Gold is Not Money – Yet
In the 1970’s John Exter created “Exter’s Pyramid”. The pyramid classified financial assets in terms of risk. The riskiest, and largest, asset class in the pyramid is derivatives. The least risky, and smallest, financial asset is gold. Read more on Exter’s pyramid here.
Today, gold is unloved by many, from Central Banks to Warren Buffet. And of course gold does pose a threat to the ever more desperate Central Banks worldwide. However, today gold is not money. For example, you cannot pay for your groceries with gold, it has to be cash or credit. But for most of the last few thousand years’ gold (along with silver) has been money.
The most commonly considered factors that define money are:
- Supply is either limited or controlled
- The supply of new gold is very limited
- Fiat currencies are government controlled
- It is fungible (pronounced “funjible”), or freely interchangeable
- An ounce of gold is the same as any other ounce of gold
- One dollar is the same as all other dollars
- It is portable, either physically or electronically
- Gold and money can be transferred by either method
- Buildings and land, for example, are not money
- It is divisible
- An ounce of gold or a hundred dollar bill can be divided into many smaller parts
- Art or collectibles are not money
- It is liquid and readily exchangeable
- This does not apply to gold today
- Most currencies are accepted by all
From the above, gold is very close to being money. It will become money again when faith in Central Banks collapses. Gold has another advantage over all other financial assets – it is not someone else’s liability. Unlike derivatives.
The Bank for International Settlements estimates that there was over USD500 trillion in outstanding derivatives contracts in 2015. As Warren Buffet has said derivatives are “financial weapons of mass destruction”. Many will evaporate when the next financial crisis arrives. And gold may become money again, it probably already is in Venezuela.
Finally, a couple of charts showing the gold price since 1915 – actual and inflation adjusted. Courtesy Macrotrends.
Actual Gold price from 1915 to today
Inflation adjusted gold price from 1915 to today