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Gold is not money
Thursday, February 19, 2009
Don't get me wrong, gold has been my favorite asset class for most of the last decade (for good reason) and it is the single largest non-cash holding in both my personal accounts and in the model portfolio at Iacono Research, but it grows tiresome to hear people say "Gold is money" because it is decidedly not money.
At least not today.
Well, technically, maybe gold is money today, but, you have to be very careful about how and with whom you use it because you might be in for quite a surprise if you don't properly understand its real value.
More on that in a minute.
Consult any mainstream dictionary and you'll find that the key characteristic of "money", the characteristic that gold fails miserably at these days, is as "a medium of exchange".
Some examples are shown below:Merriam-Webster
There's lots more at OneLook which, apparently, is a dictionary aggregation site (didn't know there was such a thing) and of course at Wikipedia.
1: something generally accepted as a medium of exchange, a measure of value, or a means of payment: as a: officially coined or stamped metal currency b: money of account c: paper money
2 a: wealth reckoned in terms of money b: an amount of money c: plural : sums of money : funds
3: a form or denomination of coin or paper money
Dictionary.com
1. any circulating medium of exchange, including coins, paper money, and demand deposits.
2. paper money.
3. gold, silver, or other metal in pieces of convenient form stamped by public authority and issued as a medium of exchange and measure of value.
4. any article or substance used as a medium of exchange, measure of wealth, or means of payment, as checks on demand deposit or cowrie.
5. a particular form or denomination of currency.
The point here is that gold is not a medium of exchange for about 99.999 percent of the world's population (not that it shouldn't be) and, for that reason alone, it is not money in the truest sense of the word.
Anyone saying that gold is money is probably just expressing a desire to see it function as money once again (not that there's anything wrong with that).
But, as noted above, technically, gold is money in one sense.
For example, you can take a one-quarter ounce gold coin to a bank and deposit it in your account, at which time they will (perhaps with a little help from a supervisor since most tellers have not likely ever had this request before) credit your account the whopping sum of $10.
Or, you could walk down to the local coin shop and get $265 for it.
18 comments:
I hope this isn't completely off topic...
Do you have any thoughts on the possibility that GLD doesn't hold the physical gold they seem to claim they hold?
This would be like a Madoff scenario I'm thinking of.
If you're going to invest in gold through ETFs, it seems like you'd want to know the answer to that question.
The number of tons claimed to be held (unless I'm missing something) seems almost impossible.
If it came out that GLD doesn't hold that much (or any ?!?!), it could wipe out people holding the shares in the ETF.
Again, sorry if this is OT or even crazy for some obvious reason.
If it's not crazy, perhaps it's worth it's own post?
I did some web searching and looked on iaconoresearch.com for information on this question and didn't see anything, but I could have missed it.
The dictionary definitions of "money" are pretty vapid.
They basically don't include at all an obviously important aspect of a good money: that it retains value.
A couple of the definitions hint at it by mentioning "wealth", but water it down by qualifying this it "reckoning" and "measuring". Dictionaries are generally written by statists, and are tools of the authorities (the best way to enslave people is to put them in a mental prison).
When you add back in the "retains value" requirement, no fiat currency in the world qualifies as money. This makes sense, because they really aren't money: they are only currencies!
If you take away arbitrary government edicts to force paper money [currency] on people, guess what emerges as money?
Gold and silver.
That tells me what the real money is. People who say "gold is money" aren't so much expressing their wishes as simply moving beyond a relatively short historical period and capricious government interventions to arrive at their definition of money.
At any rate, if gold isn't money, then neither is the dollar. Then the effective question is: which form do you want most of your wealth in for the next 5 or 10 years?
I personally don't see gold as an "investment" at all. I see it as a means of preserving wealth, which if not "money", is the aspect I'm most concerned about right now!
Interesting references:
Zimbabwe - Gold for bread (think-- is Zimbabwe separated from us by a matter of anything other than degree?)
Is Gold Money? - by Robert Blumen, takes a very level-headed approach to the question.
I absolutely agree. Money is the medium generally accepted for goods/services. Gold is not money. However, gold is not money because every state/kingdom/empire/cartel desires the public to use their fiat paper as money. The obvious incentive is the ability to print fiat paper to finance whatever the state desires.
it's not an easy medium to trade with because everyone has moved away to paper money. but banks still lease gold. and it is a medium of exchange, the same way a barter exchange would work.
The reason for the low face value of the coins is to prevent arbitrage. take silver maple 1 oz Ag- w. a $5 face value, but silver is trading at $14 but if the face value was priced at $14 and spot price dipped below, then the coin would be worth more than the silver. england (long time ago) had a arbitrage play w. gold and silver, where it was profitable to just buy the coin and melt it for the silver/gold.
My question is, could a small country that operates as an offshore bank haven, issue money based on gold and have it be successful?
Gold coins are legal tender, aren't they? I mean, as you mentioned they have a face value stamped on them (i.e. $50 for 1 ounce eagle). I was wondering about this when Obama announced the salary cap of $500,000 on bailed-out bankers. Couldn't they just pay themselves in gold coins? $500K equals 10,000 coins, which has a real street value of just under $10 million. Then they can still get the paycheck that those poor bankers so desperately deserve...
Nostradamus, the question you raise, viz. "Do you have any thoughts on the possibility that GLD doesn't hold the physical gold they seem to claim they hold?" is neither off-topic nor crazy.
I refer you to a post today at Seeking Alpha entitled Is the GLD ETF Really Worth Its Metal on just this subject. According to the author, according to the GLD prospectus itself, the Trustee of the fund has no legal right to conduct a audit of the physical gold which supposedly backs the value of the GLD shares and apparently the Trustee and it's independent auditors are obliged to take on faith that such gold actually exists and is held in various Custodial vaults.
If true, it's pretty astonishing.
Anonymous
Yes, thanks, I just found that same article myself as I really dug into this issue.
This is quite an amazing idea to me.
After the Madoff mess, I have become EXTREMELY skeptical of all these investment schemes.
I carefully read the article you referred to and another one and then I re-read the GLD prospectus. I'm a lawyer so I immediately recognized the weasel words being used in the prospectus.
Based on what I read and what I know about human nature, there is NO WAY I would invest in GLD.
Gold IS money, however people are not educated enought.
Money are:
1. Medium of exchange
USD = yes, GOLD = yes, but not generaly accepted, Diamonds = defenetly no
2. Measure of value / account
USD = yes, GOLD = yes, Diamonds = no
3. Transports wealth through space
USD = yes, GOLD = yes, Diamonds = yes
3. Store of wealth , can be said "Transport" wealth through time
USD = defenetly no, GOLD = yes, Diamonds = probably yes
--------
So gold is money, but similar to foreign currency, you need to exchange it to local currency, before purchase something :-)
Gold may not currently fit the definition of money. But it once did. And it probably will again fairly soon.
When fiat money won't serve as money (no store of wealth) they will need something else to use. And gold looks pretty ready to assume that role.
Isn't part of the reason for buying gold NOW is that it will soon have a much higher demand AS money and so your gold will appreciate in value, just as the dollar rose in relative value this winter as people demanded it to buy treasuries with.
I want to buy it cheap and then own it when the changeover happens.
I am also concerned about GLD, own some, also own other derivative forms that are worrying but have been very profitable (DGP) .
But the alternative (coins,bars) bring such a premiums and are not as liquid. I suppose the goldmoney/perth mint/etc are better bets but they may require some expense as well, especially if you're trying to do all this within an IRA.
Tim,
I agree with your post.
Aaron and some others,
It's not befitting to change the definition of a word just because you want it to mean something else. Money is not required to retain value, and I have never seen a dictionary that states it must. I'd like to see a reference to a credible source that states as much.
However, if you would insist that "money" could not lose value, there is only one thing that could equate... time. Yes, the old adage of time equals money is still true. Unfortunately, once it is spent, it can never be returned.
As an example of how gold does not retain its value: the process of producing gold is more efficient today (and growing more efficient, lowering the real value of gold), and some key major finds could substantially depreciate the real value of gold. So, even gold does not retain value. It's an asset just like any other; except that some assets pay a dividend. I still can't eat gold or live in gold; it has little value to me unless someone comes along and pays me more for it in the future; I would define that has a gigantic ponzi scheme.
Lady Liberty needs a bra.
I'm quite uncomfortable about the whole idea of Chuck agreeing with me on anything so, clearly, I should rethink this a little bit...
Seriously, this is all just semantics, though it would be nice to see more people transacting business in something other than fiat money, except of course for Wall Street CEOs being paid half a million in gold coins.
I'll have to look at the GLD inventory again - thanks for the links. I remember when it was launched in 2004 that people like James Turk saw how it could be abused.
For the record - I've always advocated phyical possession up until the point where storage becomes a problem since, over the long term, it is far more economical.
Nice article detailing the technical aspect about whether or not gold is money. While technically gold and money don't fit the same definition today, I'd guess that most people would still say gold is money.
This is because gold and other precious metals hold value and can always be traded for money. So even though it doesn't fit the dictionary definition, people will still say gold equals money.
As for the highly suspect GLD gold inventories, I've also heard how it could be abused and manipulated but I guess there's no way to be sure. It's also possible for SLV to be manipulated and the terms of that ETF even state that silver stockpiles can be replaced with "substitute" bullion.
So just like Tim in the previous comment, I've also always advocated owning the physical metal. Now that platinum, gold, and silver have broken out of their price base, it's a great time to buy. Look to buy on the dips.
Chuck:
I am not attempting to change the dictionary's definition; I am just suggesting it is a poor one. You are dodging the issue.
If money is as defined above, what is currency? Just a synonym for money? If so, it shouldn't be. Currency has a specific etymology from which its meaning derives. It is related to the root curr- -- flow, or immediacy. It is now-value, not long-term- (or forever-) value.
"Money" comes from latin "moneta" which refers specifically to coins in the classical sense, that is (typically) silver.
I would say there is a difference, perhaps "lost" or subverted. But one doesn't gain any additional insight from adopting ambiguous definitions.
Other interesting observations:
- Most people actually DO think the dollar is backed by gold. So the presumption here is actually that gold is money, in both senses.
- Goldmoney.com and services like it allow one to electronically spend gold as easily as any modern digital currency. It is therefore increasingly difficult to make the excuse that gold is "hard" to transact.
Ponzi:
Also, you illustrate finely how you are missing the very point I was making about gold being money, not an INVESTMENT. I specifically did not say it was an investment; in fact that is Tim's implicit perspective in the article, and I don't think it captures the true and full essence of gold.
Anyone who buys gold expecting an "automatic and general" appreciation is exhibiting Ponzi scheme behavior. But that is no more true for gold than any other asset.
I happen to think gold is historically undervalued, but I don't have any illusions that I will do any better than simply (and approximately) preserving my wealth.
As the old rule of thumb says, you should hold 10% of your wealth in gold as "insurance". This is pretty accurate, because historically gold only gains rapidly in exchange value in times where financial and monetary systems are in crisis. And then it goes back. This is the nature of insurance, not an "investment."
Incidentally, most "investing" today is bogus because people should just be parking their savings in sound money (gold and silver), not Wall Street snake oil. We now have PIMCO gambling on government bailouts, and state pension funds investing in hedge funds. This is madness. Investing is not to be put on autopilot by the unwashed masses.
Sound money generally appreciates as the economy advances, which is plenty of appreciation to run a stable, advanced economy (and one where the masses don't get fleeced every 10 years, I might add). Yes, mining technology and supply can change, but this tends to not be a big deal over long periods of time.
Gold is money.
Gold is accepted everywhere in every country on earth.
Currently it is 4th most powerfull form of money on earth in line behind the USD, EURO, YEN and then GOLD.
China is trying to get he YUAN to move up in power.
Many believe GOLD is ultimiatly more powerfull then any fiat currency becase they are just paper ponzi schemes.
Tim, Eric and the others-
That "$10" gold eagle isn't legal tender at all, really.
If I use it at face value to pay for something, which I can do, fine.
BUT, the tax authorities value it at its gold value for income tax, withholding, social security taxation, and so forth.
People had this idea when the gold and silver bullion "coins" came out, and used them to pay the newly renegotiated salaries of his employees.
Employers and employees paid the various taxes, of course, on the coin face value.
The cases wound through the courts, and eventually the various governments were upheld in their position that the face amounts were unrelated to the actual value, and that receiving these items was in the nature of a barter transaction.
staghounds:
My understanding is some US state courts HAVE ruled that US bullion coins must be valued at face value by the state (e.g. for tax purposes). I don't doubt that there are opposite rulings.
I am in favor of those who have ruled that the legal tender (face) value must be obeyed by the government. Otherwise, on what basis is a bullion coin fundamentally different than run-of-the-mill legal tender US coins? From time to time (like, within the past few years) nickels and even pennies have had metal content values higher than their face value. Does this somehow undermine the face value? Obviously not.
The real problem here is the government has backed itself into a paradoxical corner: it wants to sell bullion coins and reap a gigantic seignorage, but it has to obey the fictitious "book value" of gold carried by the Fed when establishing the legal tender value of the coin. But then for tax purposes, as with all other US coin, it should be forced to obey the legal tender value. That means the government could potentially lose about 19/20ths of the metal value of every coin for tax purposes. Oops!
I don't think they should be able to get out of this situation with incoherent, ad hoc court rulings.
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