Gold is a commodity, not money?

[powayseller]

Isn’t gold just another commodity, since no money supply is tied to it?

Why does anyone say that gold is money? What money system is tied to gold?

If the dollar loses value, you can perhaps get more dollars for your gold, but you cannot suddenly start buying stuff with gold. Or silver.

The only place I know which takes gold as payment is Zeal.

If gold is money, why doesn’t anyone take it as payment? For all you goldbugs, do you take gold as payment in your business? In your personal life?

This is not to say gold couldn’t be money. But today, it isn’t.

Any disagreements, and why?

[an]

You might not be able to buy things with gold here in the US. However, places like Vietnam, big purchases are usually measured in gold. I’m not too sure about China or India. So there are places that you use gold to buy expensive things.

[rseiser]

“Gold is the King of Money”, while “Oil is the King of Commodities” … is the common saying. There have been so many articles that opined on the differences, but let me just throw in a few:
-Historically there has been a clear difference in the value of gold (+precious metals) and other commodities. Take for example a strong deflation. Here, money (and especially gold) becomes worth more, while commodities crash due to drop in industrial demand.
-This is basically because gold has usually strong monetary demand (and small industrial demand) and copper, oil, lumber have strong industrial demand (and small monetary demand). The reasons are, that gold can be better stored, divided, exchanged, transported, and authenticated, and since it is expensive, the industrial use is confined to special applications. The result is further that gold trades at a strong premium to what it costs to mine, while other commodities are usually closer to their intrinsic cost (more or less).
-Gold has been universally accepted as barter for thousands of years. It has the value that it trades on a free market. This can be the futures market (say $660/oz.) or gold coins (which you can sell to the dealer for say $640/oz.). Any person on the street that has goods worth say $620, would be crazy not to accept an ounce instead, which he immediately can sell or exchange with the next person. (Legality and taxation not withstanding)
-Yes, I get the point, that shops price their goods in dollars and not in gold. But all three are still exchangeable with each other. Both, gold AND the dollar have some risk. People might charge more in ounces of gold for a while (like in 1999, or theoretically there could be a huge depository found). The same can happen to the dollar (if the government is reckless, or a huge depository is found in Uncle Ben’s backyard).
-On average, throughout history, gold was closer connected to the price of goods (say a well-made suit, for which you had to work, say, a week) than the dollar (or many other paper currencies)…That’s money for me!

[4plexowner]

I can’t speak for all goldbugs but I will answer for myself.

Yes – gold is just another commodity.

There are no currencies currently backed by gold. Actually, there are NO non-fiat currencies on planet earth right now. (this is another trend that will mean-revert – ie, we WILL have a precious metals backed currency again)

I don’t claim that gold is money or that gold is tied to any monetary system. What I do point out is that human beings have chosen silver and gold as a store of value for thousands of years. It is also worth noting that governments remain small when a gold standard is used and warfare is limitted and local.

I don’t have to be able to buy anything with silver or gold. Under the current US laws, I can trade silver and gold for US dollars any business day of the week. The transactions are not reportable to the IRS or government as long as certain thresholds are not crossed. I recently traded some silver bullion for a stack of Benjamin Franklins. At some point this summer I will be trading Mr Franklin for silver bullion.

And you actually can make purchases with silver today although it wouldn’t make any sense. If you were willing to spend your 40% or 90% US silver coins at the store you could do so – they are legal coins minted in US mints. A 1963 or earlier silver half is worth 50 cents at the grocery store and about 4 dollars at the coin shop. I’ll take mine to the coin shop.

So, we are in agreement – gold is not money today.

Here’s some pieces of the bigger picture that I see:

> there will be a precious metals backed currency again – it will probably be China or an Asian bloc and it will likely be introduced this decade

> silver and gold don’t change in value – fiat currencies fluctuate in value relative to the precious metals – an ounce of gold in 1910 is still an ounce of gold today – in 1910 the ounce of gold was worth 20 US dollars – today the ounce is worth about 640 US dollars – the gold didn’t change

> Western countries have been sold a load of goods by central bankers – the dishonest monetary system that the banking cartel introduced is starting to fall apart – as the decay becomes more obvious people are moving into the precious metals – look at the upleg gold had from March when the US Fed stopped publishing the M-3 money aggregates – do you think this timing is a coincidince? – this movement into silver and gold will increase in the next few years

> the US dollar is being rejected as the world’s reserve currency

> commodities are in a secular bull market that will run until at least 2011 and probably much longer

> gold will be at least $1650 an ounce before the commodities bull is done

> silver will be at least $80 an ounce

[Jim Brubaker]

Gold is universally accepted as cash money. How many countries have had the same government for 75 years–not a lot. When you change governments, you change currency. Poof there go your savings. Most of the big countries hold large amounts of gold. All they have to do is print paper to own it. Not a bad trade.

99% of the worlds gold is still with us. That doesn’t really sound like a commodity. In my world commodities get used up. Don’t quote jewelry consumption, that usually quoted as a percentage of the current years production and that gets recycled eventually.

An ounce of gold can be hammered into a sheet of foil measuring 70 square feet. Then there is electroplating.

Ever wonder why the US government went off of the gold standard? You can’t print more money unless you back it up with gold. Without the gold standard, there is no restriction on printing money.

Inflation is a way the government can tax everyone. Free health care, social security for everyone, free home ownership. Gold doesn’t have to buy this pipe dream. Gold could hit $3,000 per ounce, that doesn’t mean you’ll be rich, it means that you had better ask your employer for $3,000 a week as your salary.

In 1964 my dad made $7,000 dollars a year and our house cost $25,000 brand new. My mother didn’t have to work. Gold was $32 an ounce. The school lunch was 25 cents

If you think of gold as an investment or commodity, keep away from it. Gold is an insurance policy, it will buy just as much today as it will in 30 years.

There is another saying, “bad money chases out good money.” Have you seen any real silver coins lately? The government didn’t melt them down. How about a $5 dollar gold piece? FDR passed a law making it illegal for US citizens to own gold–they repealed that in the 60’s (I might be wrong on the date).

[lindismith]

Yes, I agree with Jim who says “gold is universally recognized as money.” When my folks decided to emmigrate from South Africa in the late ’70s, they could only take a certain amount of money out of the country, so they opted to convert some cash to Kruger rands, and bring them out of the South Africa, and into the US. I’m not exactly sure how they converted them back to US Dollars, but believe me, many things can become cash if there is a buyer for them. It really doesn’t matter if it’s a commodity or a currency, it just matters that you can trade it.

[sdduuuude]

It depends on how you define “money.”

I think of money as “any item that is universally accepted in trade with anything else in a given geographical area.”

To me, money is a tool that facilitates trade, nothing more. It allows trades to happen that could otherwise never happen.

Before money (per this definition) everything had to be bartered. If I had wheat and I needed shoes – I had to find a shoemaker that needed wheat, which may be a very limited market. My feet may freeze or the wheat may rot before I can find a trade partner.

To alleviate this problem, gold was used as a tool to facilitate the trade, to open up the markets. Yes, gold is a commodity, but it has unique properties which make it useful as a trade facilitation mechanism (i.e. money):

1) It is physically useful.
2) It doesn’t get consumed.
3) There is a limited amount of it in the world.
4) You can’t manufacture it.
5) It is very dense, thus small in size for a given weight.

Items 2, 3, and 4 make it very “stable” as the supply is naturally regulated by the only laws which nobody breaks – the laws of physics.

After a while, some smart guy realizes, you don’t actually have to move the gold around with you. You could store lots of gold in one place and trade pieces of paper which identify the holder of that paper as the owner of a certain amount of the stored commodity. This is real “money” at its best. Money should be a title of ownership to something physical, durable, useful and stable in supply. It is these traits that make money univerally acceptable.

With this concept of money in place, if I have skills to provide a service and I need meat, I don’t have to find a rancher who needs my services. I can find anyone who needs those services, get paid in money, and pass the money onto the rancher in exchange for meat. AND I don’t have to carry the gold from my customer to the ranch.

If a piece of paper gives you title to an ounce of gold, that piece of paper (money, currency) is said to be “backed” by gold. If a currency gives you title to a ton of corn, that currency is “backed” by corn.

Of course, corn is a silly item with which to back currency, but if you wanted to use it – hey, knock yourself out.

So, lets make a distinction between gold as a currency (where you carry it around in your purse and give it to shopkeepers) and gold as a backing for currency (where you carry around paper which gives you title for gold stored somewhere).

Unless the gold storage and/or banking system became un-trustworthy, gold itself may never become popular as money simply because it is heavy and difficult to store securely.

However, pieces of paper backed by gold, silver, diamonds, platinum or some other durable, valuable, and stable commmodity could easily come back. I hope it does.

The mere emergence of a “gold-backed” currency could, in fact, increase the popularity of physical gold as money because you would know exactly how much you were paying with respect to the gold-backed currency. Of course, every store would have to buy a scale, which I just don’t see happening.

[sdduuuude]

After thinking about this, I have this question:

Why can’t a private entity create a gold-backed currency?

Simply build a vault, start taking in gold and pass out pieces of paper which give title to the gold deposited, taking a percentage of the gold as payment for the security services.

I mean, if a gold-backed currency is so desireable, why hasn’t the market provided such a thing, independent of government?

[rseiser]

There are several services that do that. I guess e-gold.com comes to mind. Even an ETF like GLD is not much different, except for the extra transaction via dollars when doing a purchase or sale. I guess the government wouldn’t be too happy, since all the capital gains taxes created by inflation would dissapear. They will have to raise taxes somewhere else.
Also, even while gold is different from regular commodities, it still used to cause these cyclical fluctuations from credit creation (inflation) to bust (deflation). The establishment decided that with managing a fiat currency they could better phase out those swings. Of course they never got beyond the “credit creation” phase either, since they didn’t have the guts to reduce the money supply (except hero Paul Volcker). So with gold you would have booms/busts, and then we would have to take our medicine from time to time (or prepare better ourselves). Doesn’t sound wrong either. Also, better than a basket of commodities in my opinion, since then again it becomes arbitrary, which ones to rebalance and when.

[PD]

Sdduuuude has an interesting idea. Creating a new currency backed by gold would be a huge undertaking. I suppose you could start small. There would be a lot barriers to making it work. You would need a lot of gold and a secure place to keep it. It would be expensive and difficult to start. People would have to be convinced to use it.
Would whoever started it have to issue money worth slightly more than than the actual gold backing in order to pay for the whole enterprise?

[powayseller]

4plexowner – in mid-May, gold dropped quite a bit. Was M-3 suddenly not important anymore? I am glad I didn’t buy gold then. According to Zeal, gold is still overvalued today.

Did you know that speculators accounted for the gold bull run, increasing the global value of gold by $847 billion in just 34 trading days? Wow, at that rate, “it would soon suck up all the capital on the planet like a financial black hole.” Zeal expects gold to fall unde its 200dma before this correction has run its course.

Thus, buying gold is very risky, because you can lose lots of money. What if I had believed the people on this forum to buy gold because it’s a store of value?

I would have lost 30% of this supposed value.

I am still not comfortable with gold. It is as volatile as any stock out there.

You say the dollar will lose value, but it is not volatile like gold. Perhaps some day that will change. But I do not like roller coasters.

[4plexowner]

I found it interesting that in the June Zeal Intelligence newsletter, Mr. Hamilton labelled all of his charts with March 23rd but had this to say in his text: “But out of the blue on March 24th gold soared $10.”

I’m guessing that Mr. Hamilton is being politically correct with his “out of the blue” statement. It seems like more than a coincidence that gold, silver and copper all broke out in new uplegs on March 24th.

So, if dropping the M-3 data on March 23 initiated this last rally, why did the rally end in May? Is M-3 data important in March but not important in May?

Well, as Mr. Hamilton points out, markets breathe in and they breathe out.

Dropping the M-3 data appears to be the impetus for the latest rally in gold/silver/copper.

The fact that these markets are now correcting doesn’t indicate that the M-3 data is no longer important.

If gold never corrected after the March 23 breakout, the gold bull market would burn out very quickly without reaching its full potential.

The current correction allows sentiment towards gold to become balanced again before the next upleg.

I was fascinated by the overall growth of the gold market in the 34 day upleg. $847 billion – WOW! These are the kinds of insights that make me think Mr. Hamilton is invaluable.

If you go back and read my posts, you will find that I never recommended anyone taking a position in silver or gold. What I did say is that I would be adding to my position when gold and silver converge on their 200 dma’s. At the time you were asking about gold, it WAS a risky time to buy and several other people in the thread pointed that out.

I established my position at prices much lower than today’s so I’m not concerned about the current correction. It doesn’t feel like I have “lost a lot of money” and I am very excited about laying in my positions for the next upleg in silver/gold.

As with any investment/trading position, you only take a loss when you sell. For you to “lose lots of money” you would have to buy high and sell low (which is what most “investors” do).

This is why I believe the first thing any investor/speculator/trader needs to do is figure out a ‘big’ picture in which to take action. A trader’s big picture might only cover one day or three days. The speculator might consider a few weeks or months to be his ‘big picture’. The investor is probably looking at six months to several years.

When I talk about silver and gold, understand that I am looking at a ‘big picture’ that goes out to at least 2011. Anything I say about silver and gold BULLION fits within this big picture. I don’t talk about the stocks of silver/gold miners because I’m not interested in providing trading advice. I will (and have) pointed out the resources that I find valuable for trading the stocks (www.zealllc.com !!!).

Yes, gold and silver are volatile. Several of the people I follow believe that this volatility will increase. Jim Sinclair believes we will see gold moving in $100 increments PER DAY before this bull market is over. If that is too volatile for you then make an appropriate decision.

I am confident that gold is headed to at least $1650 an ounce so I don’t really care how much it moves around on a day-to-day basis. Same with silver – since it is headed to $80+ an ounce I’m not going to worry about it correcting from $15 down to $9 (I hope!).

My main points:
> decide what you are: investor, speculator, trader
> if you fall into more than one of these categories you need to allocate certain percentages of you overall portfolio to each category
> develop a ‘big picture’ that is appropriate to the timeframe in which you plan to remain exposed to the market
> it is the ‘big picture’ that keeps you from dumping your position when a correction comes along – if I didn’t have a big picture for silver and gold I would probably be an unhappy camper right now because of “all the money I just lost” in the current correction

[powayseller]

Alan Hamilton, editor of Zeal Investor, writes that the March 24 gold upleg was due to speculators. Only speculators can cause such huge price upswings.

Chris Johnston, in his June newsletter, did some analysis of gold, US$, and inflation. He found that historically, gold is linked to inflation, not the US$. I e-mailed him the Zeal newsletter, which writes that gold is linked to the US$ in Phase I, but not in Phase II. Now I”m really confused, because both present data (charts) in making their conclusions. Zeal found that in the last gold downleg, there was an 88% probability of it being linked to the rally in the dollar.

I am not a gold bug, nor a gold bear. Still trying to decide how to handle all this.

Where do you recommend getting gold bullion? When gold comes down in price, I would like to put 1% of my assets in gold bullion. The advantage that I see:
1) The government can’t tax you on physical assets you can hide in your house. No capital gains tax on gold.
2) If you have to file for bankruptcy, or someone sues you, or the colleges ask about your assets, your gold is hidden from view.
3) If the terrorists figure out how to destroy our communication system, and there are computer outages/glitches/wipeouts, your bank account data could be temporarily lost or inaccessible. Your gold is not.

I think I’ve been negligent in keeping all my money in electronic accounts: banks, brokerages, mutual funds. I’m being completely dependent on this electronic system to never malfunction. Some cash, some gold in a safe, some food storage in case of earthquake or bird flu (a question of when, not if), is just part of responsible planning for my family.

[PD]

I sold some gold coins a few months ago that I have had for 15 years. I could not have picked a worse time to sell them.
Is it better to have bullion or gold coins?

[4plexowner]

inre the March 24 upleg: I agree with Mr. Hamilton that only speculators can move a market as large as gold ($2.7 trillion @ $550/oz by his numbers) up $847 billion in 34 days. I’m assuming that dropping the M-3 numbers was the trigger for this upleg but I’ve been wrong before.

Talk to Mike and April at Cellar Coin in PB if you are interested in purchasing physical metals. Mike has consistently had the best prices whether I was buying or selling. (PS: Mike won’t know who you are talking about if you tell him “4plexowner sent me” and I don’t benefit from his business in any way)

Excellent reasons for holding precious metals, powayseller. As Richard Russell points out, gold will always be worth something but who knows about paper assets.

Also prudent advice for everyone to be prepared within their homes. Start with the idea that you won’t have any supplies except what you have inside your house for three days (no grocery store, 7/11, COSTCO, etc). That means you need water, food, etc. Then work up from that point – add some dehydrated or freeze-dried foods. George Ure (www.urbansurvival.com) recommends focusing on high-protein foods for storage (#10 cans frz-dried chicken, for example). Do you have a first aid kit in the house? Think about the things you might need in an emergency situation and make sure you have them on hand. Pay attention to natural disasters that have occurred in the US – one of the things I notice is that stores that remain open stop taking anything except cash for payment – no credit cards, ATM, etc – plan appropriately.

I find it amazing to think about today’s electronic financial world and the potential for problems. Rick Ackerman (www.rickackerman.com) paints this potential scenario: a financial meltdown occurs overnight in Asia or Europe and the US markets don’t open the next morning. All the stocks and bonds in the world won’t do you any good if they only exist in an electronic account somewhere.

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