The use of gold investing as a savings vehicle has been coming to the forefront once again in recent years as investors look for ways to protect their money against the fluctuations of the U.S. dollar, especially amid a geopolitical environment in which international trade wars threaten the economy. But does gold serve as a functional currency in addition to a sort of financial insurance?
The simple answer here is “no,” the days of gold being used as an actual currency are long gone. Sure, gold was used as money a couple centuries ago. If you wanted to buy something, you could hand over a gold coin or two. This simply isn’t something that exists in the Western world anymore.
That being said, gold does still maintain one of the three important characteristics often associated with functional currency. Let’s analyze those three characteristics.
Easy transactional exchange
For something to be considered money, you must have the ability to exchange it easily in a transaction. Here, gold fails the test. You can’t walk into a store and pay for something with gold coins or bars. You can, however, pay in paper currency or standard coins, write a check, use a credit or debit card or make a wire transfer. There are very few people in the Western world who will take gold for payment.
A method of measurement
The next characteristic of functional currency is its ability to act as a unit of account. If you open a company’s income statement, you’ll be able to see how much revenue, assets, profits, expenses and liabilities they have in the form of dollars (or other international currencies). These types of financial measurement tools are used constantly.
Substitutes for traditional currency, such as gold or bitcoin, fail this test as well, as it is significantly more difficult to determine how much you’re paying with these items in comparison to the everyday transactions you make with standard currency.
Store of value
The one characteristic gold does share with functional currency is that it acts as a store of value. It is an answer to the question of where you can safely store your wealth accumulation and savings and have it maintain its value. Gold’s biggest value lies in its ability to store hard-earned value and wealth. This is true over a long period of history—gold has for thousands of years been seen as a way to store value.
When central banks first got their start, they actually traded gold and used it as a reserve because it was so successful at retaining value, hence the “gold standard” term you have likely heard with regard to banking.
All this being said, however, gold simply cannot be considered a functional currency in today’s world. While it is an excellent means of storing value and protecting against fluctuation of values in other assets, it no longer is something that can be used in everyday transactions. Contact Gold Wealth Financial for more information about gold investing or to arrange a consultation.
- by Steve Hunt
Categorised in: Gold Investing