Monday, November 21, 2011

Why is Gold Money?

There is much debate in the finance world about the role that gold used to play, and may play, in our monetary system.

One of the common questions about gold is why it should be classed as a monetary asset. Why should people think of gold (and silver) as being 'money'.

It's not an easy question to get one's head around. We don't normally give much thought to what money is. We work, we get some folding stuff, or digits credited in the bank, and then we whittle that down by buying the necessities of life and perhaps a few luxuries. This allows us to live normal lives, hopefully in freedom, to be able to better ourselves, our families and those around us. We seek a strong society based on peace and freedom.

The issue with money is value. If we place value on fiat paper money, then all well and good. As long as we all agree on its value and that value remains constant, or pegged to some identifying standard, (like stable, trustworthy government) then we are happy with that scenario and forget about what money is and just live.

So money could be anything. It could be bits of shells or cattle or whatever. So long as value is swapped with that medium of exchange and both parties to the contract are in agreement, then a change of ownership will occur.

Here again are the main six attributes of money:

1. A store of value. ie. rare. It must have value on its own merits.
2. Fungible. Each unit of weight is equal to another equal unit of weight.
3. Divisible. It must be divisible into smaller parts and easily tradeable.
4. Act as a medium of exchange.
5. Easily recognizable and difficult to counterfeit.
6. It must be easily transportable to be money.

It is evident, by what is occurring in the markets now, that people are losing confidence in the paper money they have used for 40 years now (since Nixon walked away from the last remnant of a gold standard). People are noticing that the work they do is not being rewarded with a store of value that is constant and trustworthy. They are noticing that their past value of labor (savings) is being stolen from them also.

This is why gold is now coming to the fore in this period of crisis. Society is losing faith with governments, politicians and financiers because they see them meddling with the value of the paper medium of exchange they trust in. Paper printing, bailouts and huge debt mountains are a tipping point. A light is being shone on this current system and a niggling fear is being aroused in the minds of the masses. This fear is leading to a lack of confidence in their fiat money system which could easily build into a stampede. All it takes is the right tipping point now.

Gold (and silver) are the best 'things' to fulfil the definition of money as described above. People have recognised this for over 5000 years.  Occasionally, other systems come (and go) but every time people ditch them and yearn for a stable store of value. Just how gold can be re-incorporated into a modern, complex financial system is moot. But it must be done, especially right at the start of the coming reset.

Gold in New Zealand dollars: $2280.58 per oz
Previous all-time high: $2311.02 per oz (15 Nov, 2011)

Silver in New Zealand dollars: $42.85 per oz
Previous all-time high: $59.19
per oz (30 Apr, 2011)

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