Why Gold Is Money

Tyler Durden's picture

Authored by Alasdair Macleod via GoldMoney.com,

It is clear that Western capital markets no longer generally regard gold as money. It has been relegated to the status of a risk asset, useful collateral, or simply a commodity with a history of being used as money. This is a mistake.

The great Austrian economist, von Mises, wrote that true money had to survive the regression test. Put simply, it must be established whether or not money had value before it was used as money; otherwise it is only a money-substitute which ultimately depends for its value on confidence. So we need to ask ourselves two questions: what value did gold have before it was used as money, and what value did modern currencies have before they were used as money?

The answer to the first question is clear. Anyone who has seen the Alfred jewel in the Ashmolean Museum in Oxford (over 1,000 years old), the Snettisham torc in the British Museum (over 2,000 years old), or Tutankhamen’s gold mask in the Cairo Museum (over 3,000 years old), regard these fabulous items with astonishment. They are simply priceless, being desirable beyond reckoning. There is therefore no doubt that gold, the major element in all these objects, survives von Mises’s regression test. Furthermore the Aztecs and Incas in the New World, completely isolated from Eurasian values, held the same human view.

Paper currencies do not survive this test. They started as money-substitutes for gold or silver and over time lost all their convertibility. As a result they now depend for their value on confidence alone.

Traders and investors in capital markets are unconcerned about this distinction. Instead of realising that Gresham’s Law applies, that bad money has driven out the good, they regard currency as the only money for modern times. This is understandable, because they draw up their accounts and pay their taxes in currency. They invest to make a profit in currency. And so long as they can hedge currency risk by acquiring capital assets, they can manage investment portfolios without recourse to gold.

For these practical reasons mainstream opinion holds that gold is no longer money; but this complacency is likely to be undermined by events. We already see the four major central banks committed to issuing their confidence-based currency in increasing quantities, to finance their governments and to prop up the banks. We have yet to see how they intend to stop doing so.

The effect of monetary inflation was usually predictable. It raised asset prices first, which we are already seeing. It then raised prices of raw materials and manufactured goods, as people started to spend encouraged by low interest rates, leading inevitably to rising prices and rising interest rates. The sequence of credit-fuelled economic cycles is all too familiar.

This time, given the likelihood of a financial and collateral crisis from falling asset prices, the economic cycle is in grave danger of a short circuit. Rising prices for raw materials and goods are likely to be driven by falling confidence in fiat currencies, instead of rising confidence in the economic outlook.

It will be the ultimate test for unbacked currencies. Everyone wedded to modern currencies will then wish they had been aware of von Mises’s regression theorem.

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UP Forester's picture

Damn barbarous relic, always in the headlines....

DoChenRollingBearing's picture

"Money" is a slippery word.  Gold is The Store Value.

TwoShortPlanks's picture

Gold is far more than just money.

Gold is a financial anchor into physical and mathematical reality, and a financial healer when it is not.

Gold also has unlimited capacity for wealth concentration…given the right set of circumstances.

http://twoshortplanksunplugged.blogspot.com.au/2013/05/gold-silver-real-estate-and-next-move.html

http://twoshortplanksunplugged.blogspot.com.au/2013/05/kumbaya-currencies-will-bow-to-gold.html

DoChenRollingBearing's picture

DoChenRollingBearing heartily recommends TSP's blog.

The Shootist's picture

"If you want money, then you want gold." -Jim Rickards

Gold and silver are competing currencies, err, money.

NoDebt's picture

"It's not a lie if YOU believe it."  -  George Costanza

For everything else, there's gold.

I will admit I never was a "gold bug".  I'm still not..... sorta.  But it keeps piling up a little bit at a time around me.  The obvious divergence between "paper gold" like ETFs and "physical gold" like coins should give pause to even the most anti-gold zealot.

A few months ago I wrote on here I was just starting to notice a divergence between the two.  At the time I said that it could be just a temporary dislocation between price and the physical limitations of delivering actual product.  I also said if that was the case we should start to see the "paper" and "physical" gold price converge again in perhaps a matter of weeks.  Well, those weeks have now passed.  The divergence has only grown. 

If this does not make you think long and hard, I don't know what will.

On diversification grounds alone I could justify holding some physical gold.  "End of the world" scenarios are not required (but who knows, right?).

This is not an emotional thing for me.  I go where the facts and circumstances tell me to go.  If it was just an emotional thing, I wouldn't own any.  But reality tells me I should own it, so I own it.

That's as close as you're ever going to get me to saying "I'm a gold bug."  It may not sound like much, but if you understood where I started from on the issue, you'd understand how far my thinking has evolved regarding gold.

 

Stuck on Zero's picture

They're cool but I'll bet a nickel they never see the light of day.  The side tip is ridiculous and if one goes over the side of the road they all go.

http://www.youtube.com/watch?v=JPt3yUXWacE

 

boogerbently's picture

Miners are the first stage.

If they raise their price, everyone else will need to adjust.

It's not like they won

Deo vindice's picture

In the Bible, the Hebrew word in the Old Testament and the Greek in the New is used interchangeably between "silver" and "money". These ancient societies knew what real money was.

Oracle of Kypseli's picture

In Castillian Spanish the word for money is plata (silver)

Proverb: Those with the gold make the laws

Bernanke is full of misdirections.

jimmytorpedo's picture

In Central America 'plata' seems to mean cash.

Tienes plata? Bueno, vamos a tomar cerveza!

I love my Libertads because they say

'Plata Pura' on them.

5 in my pocket feel way better than a C note.

Henry Hub's picture

In a lot of modern languages the word for silver is interchangeable with the word for money. "L'argent" in French for example.

Scro's picture

But the ETF trucks can only haul paper.

dogbreath's picture

It made ther front cover of a mining magazine I saw.   Look around that site a see what  that thing can do.  

supermaxedout's picture

Thats an illusion. These trucks are produced in Germany. They dont come cheap for sure. But its a nice thing to look at.
ETF EUROPEAN TRUCK FACTORY GmbH

dogbreath's picture

coming soon to a mine near you.  its all about cost per tonne

Deo vindice's picture

Do you ever post without a link to your site?

Just askin'.

Herd Redirection Committee's picture

I love ZH for the community, and in many cases, that means the links.   You have to judge people on their merits.  

JOYFUL's picture

Great point. Those who fail to distinguish between spammin, and the redirection of a comment's thesis to it's off-site source merely throw out the baby with the bathwater... no body is forced to click on a link!

Indeed, as we proceed further down the rabbit hold of the 'all new ZH' it becomes ever more important  to expand the knowledge base, diversity of ideas, and potential refuges for the real resistor... if this place's fate is to become nothin more than a slightly edgy version of MSNBC, there's a whole lot of us who will be lookin for a new nest.

Even within the framework of it's well known goldbug variations meme... ZH needs and deserves a var-i-ety of voices... not all hummin to the same boring tune!

Case in point... was this jewel of a post by the ORI*... way back http://aadivaahan.wordpress.com/2012/01/19/shattering-midass-curse-gold-... in Jan\12.... hardly music to a goldbuggers ears, but valuable food for thought! Most of us here have the wit to be equally bored with pumpers & dumpers... and seek nothing so much as a platform for intelligent discussion of the strategies necessary to survive the storm ahead... let a hundred voices thunder!

it's to be hope that the Tylers place will remain a home to that sort of real debate... but as the manipulators shut more and more doors(and mind-controlled minds!) to freedom of expression.., we greatly need places like twoshortplanks new space to keep freedom road open.

*I even miss Slewie... regardless of his over the top 'death match' manias... sometimes you don't know what you got till it's gone!

Henry Hub's picture

Well we're all still hanging in here. Not that much has changed yet, as long as you don't say anything to hurt the feelings of a particular ethnic-religious group.

Manipuflation's picture

Well stated JOYFUL.  I thought TSP's blog was well and fine as he clearly puts a lot of effort into it.  Blogging seems like being a hitter in baseball, fail seven times out of ten and you are likely to end up in the hall of fame.  It is much harder to actually do than it would appear.

I do appreciate your observation that our many small blogs do provide an alternative place to write and to develop writing skills should one be so inclined.  In effect, we are practicing that which we preach when we expound on the virtues of decentralization and individuality.  I would also agree that it is refreshing to explore other topics and not focus entirely on narrow horizons.

 

 

Silveramada's picture

I did for almost 2 years, just answering... has been only 2-3 weeks therefore many people don't even know about it

logicalman's picture

Only gold is money...

everything else is debt.

Google it.

Silver Bully's picture

'"Money" is a slippery word.  Gold is The Store Value.'


You sir are on the right track.

Here is a basic lesson in MONEY and CURRENCY (two very different things).


Money consists of 2 things:

-A medium of exchange

-A store of value


Currency consists of one thing:

-A medium of exchange


Currency can represent a store of value, but it is not valuable in and of itself.

The American dollar is a currency.

Gold is money.

Plan accordingly.


DoChenRollingBearing's picture

And you are 2/3ds the way to FOFOA.  Add "Unit of Account" as the third role of "money" and you're there.

Money really is a slippery word.  Whatever "money" you are able to save, save at least some in gold.

Ness.'s picture

The People's Bank of China released this statement by Zhou Xiaochuan, the central bank's governor, on March 23, 2009. It calls for replacing the dollar as the dominant world currency and creating "an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run".

There were various institutional arrangements in an attempt to find a solution, including the Silver Standard, the Gold Standard, the Gold Exchange Standard and the Bretton Woods system. 

 

I'm with Zhou.

http://www.cfr.org/china/zhou-xiaochuans-statement-reforming-international-monetary-system/p18916

Nehweh Gahnin's picture

Bretton Woods was already on this path.  We would be circling around again.  When you see your own footsteps in the snow, it is time to re-evaluate your strategy, and probably best to camp in the snow for the night.

not applicable's picture

The reason WHY gold is a store of value is often overlooked: because it cannot simply be printed at the whim of a Fed chairman, and it takes a lot of effort to bring refined gold into existence (mining, refining etc...).

 

One other thing about gold. One of the main reasons why it became a medium of exchange was because it was maleable enough to be cut into small denominations AND it is far more durable than any currency could ever be; gold submerged in salt water for centuries will be just as shiny when recovered as it was the day it sank. Oh yeah, and it's impossible to counterfit an element.

Gold was not an arbitrary choice. (Just wanted to expand on these little points).

OpTwoMistic's picture

Gold does not care where you live.

green888's picture

Gold is a relic of barbarism ? So is the plough. So is the fishing net. So is the fire lit in winter.

What an inexpressidly feeble phrase for anything one wants to attack- a relic of barbarism !

There is nothing particularly nasty about being a relic of barbarism. Dancing is a relic of barbarism. Man is a relic of barbarism. Civilisation is a relic of barbarism. Some relic, gold as money 

F. Bastiat's picture

The Aztecs and the Incas are also regarded as some of the first socialist civilizations, proving that what we know as socialism knows no bounds in space or time.

As Igor Shafarevich pointed out, the primitive superstitions of what we call socialism seem to be the default condition for the most primitive civilizations.

SimMaker's picture

Socialism is for the Un-evolved?

 

I agree.

JOYFUL's picture

Praise be to Bastiat for being willing to break the boringly repetitive (non)news cycle on the (all)new ZH, and inject some semblance of lively debate now n agin.

He may be off track more often than not... but at the very least he's movin along... rather than spinnin in circles.

Speakin of spin... what a let down this article is from Alastairs' previous of only a week ago...

the Incas and the rest of the 'red men' not only were anything but 'socialists' in their social organization....

but contrary to AM's distorted historical reprise.... did not valuable gold and silver that highly... in fact, in their hierarchy of precious metals, copper outweighted them both! When Pizarro and the rest of the looters went gaagaa over the gold n silver stuff, the "Injuns" couldn't at first figure out whether the 'white gods' had gone crazy, or were just conducting some elaborate hoax!

But all that is secondary to the announcement in "Big" Jim Willies' latest, that Fekete has seen the light, and reversed course from the 'gold base' iceberg which our favourite superhero -comix-commentator here(MonetaryMetalsMan)had so obviously struck his ship on! Fekete is quoted by the Jackass as saying:

“The price of Gold is headed for extinction. I for one do not believe that the price of Gold is headed for five digits. Long before that might happen, permanent backwardation would shut down the gold futures markets. Gold could no longer be purchased at any price. Gold would only be available through barter. World trade is facing an avalanche-like transformation, flattening out monetary economy into a barter economy. Practically all economists, financial writers, and market analysts have missed this possible scenario. That will pull the rug from underneath the international monetary system. Barter is the ultimate in deflation, and that is what the world economy is getting.”

Case closed. We are on the way to a total reset... wherein not only will the central banks and their hostage governments of the fallen lands be totally stripped of all real wealth -err... money?.... but the golden holders amongst the CAMPFEMA pre-registrants who refused to realize that staying tight in Gulagistan would only lead to tears... will be berift of all that they had hoped would shield them from the storm...

while the rest of the world moves seamlessly into a new age of wealth n plenty... courtesy of Jimbo's 'gold backed trade n barter system'....

Pity.

Thoresen's picture

I think you have misunderstood.

Read the original Fekete published interview here.

http://www.professorfekete.com/articles%5CAEFTheDailyBellinterview2013.pdf

Q. Where is the price of gold headed from here? A. The price of gold is headed for extinction. I for one don’t believe that the price of gold is headed for five digits. Long before that might happen, permanent backwardation* would shut down the gold futures markets. Gold could no longer be purchased at any price. Gold would only be available through barter. (By extinction he does not mean Zero!) From the interview endnotes:
Permanent gold backwardation means that, having been vacillating between contango and backwardation, the gold basis finally takes the plunge into negative territory never to become positive again. When that happens, itwill be a unique historical event. It will mark the ignominious end of the forty-odd year long global experiment with irredeemable currency. Sovereign debt, including that of the United States government, will not be worth one grain of gold.

The whole of the US debt will not be a able to buy one grain of gold. In other words, gold will go to infinity and no amount of fiat will be able to buy gold. Gold will become part of the barter system, i.e. I think that means gold becomes the money and fiat goes.

 

JOYFUL's picture

I believe that I have misunderstood what xactly be my 'misunderstanding'...

pls elucidate for me what part of the Prof's quoted words do not compliment and reinforce what I have stated above...

and just to avoid any possible 'misunderstandin' ... in advance... of what I wrote:

gold will be "money"(in the bartering sense) for the rest of the world outsidda the western Gulagistani ZOG-ruled prison plantantions which some amongst us have 'mis'-calculated to be a safe haven in the coming storm.... you(in the general sense of pre-registrant) will not be allowed to either spend, keep, or export your golden holdings....

I honestly don't know how to make this more clear... than the repeated warnings already delivered here...

I believe that the mind-control programs by which the talmudists have distorted peeples reasoning and 'survival' instincts in the fallen lands have almost completely achieved their objective. Otherwise you would know when to go.

Alll the best.

Thoresen's picture

OK.

Guess I overlooked the Gulagistani- ZOG safe haven aspects of your comment!

Gold gets confiscated/ isolated.... maybe. Just hope I can sell as it goes through 5 figures on its way to infinity!

PS. I am a great fan of Fekete.

Poor Grogman's picture

Incas were also one of the first to invent underwater storage ..apparently?

http://en.wikipedia.org/wiki/Treasure_of_the_Llanganatis

jcaz's picture

I think the Incas also invented the BitCoin......

Poor Grogman's picture

The question is.

Would the Spaniards have accepted bit coin or other money substitutes as ransom, or would they have insisted on gold?

I think we all know the answer to that...

JuliaS's picture

The Fed invented underwater housing.

nmewn's picture

I thought it was the CRA...but you can't have one without the other...plus one.

mt paul's picture

thought it was the mob..

east river estates

Milestones's picture

Istanbul has a huge underground reservoir By time time of Constantine (300 ad)I believe Rome also had a large storage system near this samr time.               Milestones