Sunday, November 21, 2010

Why Is Gold Money?

Now that the bull market in gold is approaching its tenth anniversary, people are starting to notice.

That alone should tell us that even with its ups and downs, this bull still has a ways to run.

Behind it all lies a philosophical issue, one which I discussed two years ago: Is Gold Money?

The philosophical divide looks like this: Is gold a default currency that people turn to when they no longer trust that government-created currencies will retain their value?

Which would imply that gold is intrinsically valuable, the only real money.

Or, is gold just some yellow dirt that people have always mistaken for money?

If gold does not have any intrinsic value, then its use as currency must be the product of a mass delusion.

Yet, if all people at all times in all places have held this belief,
then maybe it‘s not just an illusion.

You cannot really run a scientific experiment to decide who is right and who is wrong. Nonetheless, and very cleverly, NPR called up a chemical engineer and asked him to go through the periodic table of the elements-- you know it well; it hangs on the wall of every high school chemistry classroom-- and try to ascertain why gold, and no other element, has been always served as a medium of exchange.

For the story, click on this link.

After eliminating the elements whose chemical properties would make it useless or inefficient as a medium of economic exchange, the professor concluded that gold, and only gold, has all the properties needed to function as currency.

This doesn't really tell us whether or not gold is really money, but it does tell us why gold has always been used and recognized as a store of economic value.


Chuck Pelto said...

TO: All
RE: Gold as 'Money'?

I counsel against investing too heavily in it.


Because all it would take would be an act of Congress for the government to buy it back from you, i.e., seize it, at much less than you invested in it in the first place.


[No one's money, property or life is safe while the legislature is in session. -- Benjamin Franklin]

Chuck Pelto said...

P.S. Why do you think the government INSISTS on knowing where all the gold bullion and coin can be found? Could it be to make it easy for them to 'buy it back', should they decide to do so?

It's like weapons registration.....

Stuart Schneiderman said...

I would recommend that the government not try to take away anyone's guns and/or their gold. If they think they're having a problem at the airports, they would quickly find that to be rather mild.

Yet, if it should so happen that the dollar collapses, who really knows what will happen and what anyone would or would not do.

The lesson of Nassim Taleb's book on Black Swans is that we never really predict the past, and thus, that it is wise to think through all the possibilities, even those that seem the most extreme.