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Why gold is really money

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By Andrew McGowan – The notion that gold is money is probably an anachronism to most people. At least three generations of westerners have grown up taking for granted the idea that money is only ever irredeemable bits of paper or electronic digits on a screen.

Many academic economists shudder with horror at the thought of any kind of gold standard. For them, a continually expanding money supply – manipulated by a central bank – is a sine qua non as far as monetary policy is concerned. Governments and banks are only too happy for this intellectual climate to persist, given that they are the main beneficiaries of central bank largesse. As first receivers of newly created money, they get to spend it before prices have risen in compensation for the increased money stock.

At this point it is best to take a step back and define what ‘money’ is as opposed to ‘currency’. Money is still the same thing it always has been from the moment it was first invented in pre-history: a mental tool used for economic calculation that enables each of us to communicate what we value in an exchange. What changes throughout monetary history is currency. Gold and silver have been recognised as currency for much of the last 3,000 years. But for the last 40-odd years, irredeemable paper – fiat currency – has formed the basis of the global monetary system, with the US dollar king of the hill.

Gold is an ideal tool for measuring worth and changes in value over time. The above ground stock of gold grows by around one to two percent per year which is roughly in line with annual gains in global GDP. And contrary to what the media would have you believe, gold is not a commodity because it is not consumed.

Hence the consistency in gold’s purchasing power over time. The chart below illustrates how effectively gold has preserved purchasing power over the last six decades in contrast to some leading national currencies – an ounce of gold today buys almost the same amount of oil it would have done in 1950.

Gold is commonly compared with equities and bonds when assessing its price performance, but this is a mistake. These other two assets are investments. Equities represent ownership of enterprises that generate a cash flow. And, the bond is a cash-generating asset. Both equities and bonds represent liabilities of the issuer.

In contrast, gold generates no cash flow. It has no price/earnings ratio or management team. Even more crucially, it can be used as a financial asset without simultaneously being someone else’s liability. It is therefore apolitical money par excellence, and deserves inclusion in the liquidity or ‘cash equivalent’ section of your portfolio, rather than the ‘investment’ part. This is particularly true during bear markets or depressions. In the words of American market sage James Grant: ‘Nothing beats a little cash in a bear market, of course, and the oldest form of cash is gold.’

GoldMoney offers allocated gold, silver, platinum and palladium bullion and provides storage with the world’s leading vault operators in Canada, Hong Kong, Singapore, Switzerland and the UK. We transact in nine major currencies, and also offer extensive physical delivery and collection options.

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