What exactly is money and why is gold so important?What exactly is money and why is gold so important?

What exactly is money and why is gold so important?

So what is money and why is gold so important to it?

Today we look at one of the crucial issues of our time, is gold money?  What is it about gold that makes it arguably THE best choice to serve as money?

Well, before answering that, it would perhaps be wise to do a  quick refresher course on the system currently in place.   The US dollar currently acts as world reserve currency.  This means that the ‘strength’ of the US dollar underpins the entire world economy.

If you want to buy oil, sorry, you have to buy US dollars in order to buy the oil!  And the value of the US dollar is merely a function of how many dollars are in circulation, how much demand is there, and how much faith people still have in the US Government.

Hold on, faith in the US government?  That is one of the components that determines the value of the US dollar?  Yep, since the gold standard was finally finished off in 1971 the only thing backing fiat currency has been the belief that if you are owed money by the government ‘they are good for it’.   Now that the US government is in deep financial trouble the question must be asked again.  If a government is printing money in order to fund day-to-day operations how much longer can this charade continue?

Well, if people think the government will change its ways in the future it can go on for quite a while.  But when people start to realize it is an abusive system with fraudsters sitting on top things will change rapidly, that much is certain.  Now where were we?  What makes gold money?

(1)  Store of value;  In order to act as a store of value an item must not degrade over time.  This is a good example of why we don’t use gasoline for currency, because it slowly degrades.

(2) Easily portable; In order for something to be money it must be easily portable.  This rules out using barrels of oil or houses as money.  The amount of oil you can buy with 1 oz of gold weighs almost 2 tonnes!

(3) Indestructibility;  Yes, thats right, gold is virtually indestructible.   You left your gold coins in the laundry!  Oh no!  Oh wait, gold doesn’t rust either.

(4) Homogeneity & Divisibility;  All gold is the same (although remember to check for tungsten!), but this explains why we don’t use precious gems as money, as it is tough to say that cutting 1/10 off a diamond that the cut off is 1/10 as valuable as the original.   Not to mention how hard it would be to make change!  It was common practice back in the day to shave a little off a gold bar, in order to pay for your bar tab.  Nowadays we  of course use computer points (they are all the same, after all) but hopefully at some point in the future those computer points will be backed by gold, restoring honesty to the system.

(5) Stability of value;  Paper money is unable to retain stability in its value because it can be (and is) created out of thin air.  Dramatically increasing the supply of money without an accompanying increase in economic activity (as we are currently experiencing) results in inflation, or by another name, currency devaluation.

(6) Recognizable, and not easily counterfeitable.  Gold is recognized around the world.  It is highly valued in India, China, SE Asia and the Middle East.  Latin America is partial to silver, while North America and Europe are still more fascinated by paper money and ‘financial products’.

Between alchemists and counterfeiters, years upon years have been spent trying to counterfeit gold.  The most sophisticated form of gold counterfeiting currently involves taking tungsten which is then plated with gold, and make to resemble a gold bar in every conceivable way.

Tungsten has almost the same density as gold, so it will weigh the same amount as a gold bar of the same size. This kind of counterfeiting has only been reported with larger gold bars, so either have the bars checked out, or gravitate towards 1 oz bars/coins, which have not been successfully counterfeited in this manner.