For Centuries people have been using Gold as currency to trade for goods and services they needed. It has appeared as coinage used throughout history by various civilization around the globe. Even when monetary systems were established, gold was used to back these systems (case in point: the gold standard). Gold might not be used as money today but it has all the characteristics of money and can function as money.
What are these characteristics that are used to define money:
- Money should be divisible into smaller units
- It should be durable
- It should be scarce and hard to counterfeit
- Some part of it should be substitutable for another
- It should have some sort of inherent value
There are three functions that money generally performs
- It serves as a medium of exchange. It acts as a unit of account in transactions
- It allows the preservation of accumulated wealth
- It provides a standard of payment that’s deferred thereby allowing debt to be valued
Gold ticks all the requirements however, it is not practical to use as money. The biggest problem with gold is that it is a finite resource and there simply isn’t enough of it to go around. According to the World Gold Council, there is about 190,040 tons of gold that has already been mined. The mining industry produces about 3,200 tons of gold a year and the rest comes from recycling. Gold is valuable and will continue to be valuable which is why there are economic incentives to ensure that gold does not get lost or thrown out like any rubbish. Cash-for-gold ensure that the “above ground” gold held in the form of jewellery, gold bars and other gold used in industrial applications can be reclaimed. They also help in making gold products accessible to all. This type of gold is often referred to as “stock gold”.
The 3,200 tons of gold the is mined every year is referred as “flow”. The annual flow of gold is low compared to stock gold. On average the stock-to-flow ratio is around 60, meaning that there is 60 times more gold above ground that enters the market than there is gold mined. A ratio like that shows how liquid gold and also illustrates why gold is a store of value, a hedge against inflation – a safety net in times of economic turmoil. Gold is a highly liquid asset which means you can always sell whatever gold you have. Gold bullion is the most valued type of gold. You will always find dealers standing ready to buy gold bullion whenever you need to raise cash.
Will we ever go back to the gold standard when gold was money?
There has been a lot of talk about this happening especially with the world dealing with a global pandemic and the global economy on the verge of a total breakdown. If ever there was a good time to buy gold bullion this would be it. The return on the investment like that is bound to be higher.