Gold and Money

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Throughout civilisation gold has been used as money, but the two are less closely related now than in the past.

Modern currencies (like many older forms of money) can have their supply expanded by diktat, usually by a government or a central bank. All modern money is subject to government in this way, which means that the value of savings is decided, to an extent, according to a political agenda.

Modern savers are exposed to any economic or political crisis which could cause money to be over-issued, so their long term prosperity depends on the reliability of the political mechanisms for imposing monetary scarceness.

Gold used as money

Because of its rarity, gold imposes scarceness, which is what occasionally makes it useful as money. However, historical precedent indicates it is not always in politicians' interest to keep money scarce. Whether or not a physical manifestation of money, in the form of bullion, is a desirable thing is open to debate at any given time. But if a monetary material of reliable scarceness is desirable then gold is still as appropriate as ever. The investment question concerning gold is not whether or not it reliably imposes scarceness, which it does, but whether or not such reliable scarceness will in the future be required by savers.

Because the significant majority of people currently believe that governments and central banks have sufficient skill to manage the supply of money gold's use as a monetary material has waned, especially over the last 70 years. This is a regular pattern. Gold will quietly slip into the background when paper money becomes widespread because, as the famous Gresham's Law says "bad money drives good money out of circulation". But part of the mystery of money concerns gold's cyclical re-appearance, which the following section aims to explain.

Gold bullion coins

The standard weights of bullion coins are: one ounce, half ounce, quarter ounce and tenth ounce. Other weight of gold coins available include twentieth ounce, one twenty-fith of an ounce, two ounces, ten ounces, and one kilo.

There are a number of gold bullion coins in circulation in the world. The attraction of these is that they retain near full bullion value regardless of either change of government or being transported outside their country of issue.

The major bullion coins:

Issuing CountryCoinAvailable fractionsFine gold content (full coin)
AustraliaNugget10, 2, 1, 0.5, 0.25, 0.131.104 grams
CanadaMaple1, 0.5, 0.25, 0.1, 0.0667 (1/15th), 0.05 (1/20th)31.104 grams
South AfricaKrugerrand1, 0.5, 0.25, 0.131.104 grams
United KingdomBritannia1, 0.5, 0.25, 0.131.104 grams
United KingdomSovereign1, 0.57.315 grams
United StatesEagle1, 0.5, 0.25, 0.131.104 grams

Note: 31.104 grams = 1 troy oz.

Gold coins were hardly produced anywhere between 1933 and 1965. Then, once the private demand for gold ownership had been nearly extinguished, it was finally the South Africans who started minting again in earnest from 1967. But there are still very few gold coins around, and currently there is nowhere that they circulate effectively as money.

There are practical problems with gold being used directly as physical legal money. It is too valuable to represent the smallest required unit of currency. For instance, in America, a dime (ten cents) is equivalent to rather less than 1/100th of a gram of gold. The physical size of a dime's worth of gold is a cube of edge 0.8 millimetres, i.e. about the size of a crystal of brown sugar. This is far too small to be practical. The smallest usable coin really needs a volume of at least 150 times larger. This makes token coinage a necessity.

Token coinage systems

Any coin collection will clearly show that by far the most common systems for coinage are indeed based on token values. Governments decree that a given coin, worth in metallic terms substantially less than its monetary face value, constitutes a legal payment of a debt. To support this construct it has been necessary to forbid independent manufacture of coins, and to assist enforcement by making the technology of coin production relatively difficult to copy.

Deliberately overvalued coins tend to stay in circulation precisely because they have no intrinsic metallic value, which is a material advantage to the state, and even though in such systems silver and gold coins are occasionally allowed to circulate in parallel and in modest numbers their circulation generally declines (Gresham's Law again).

Gold as a banking reserve

The unsuitability of using gold in coins for cash transactions at the small end of the monetary scale is not the only barrier to a gold centred currency. There are other difficulties in using a gold based currency where large sums are involved.

For example, in modern economies normal practice is that salaries are paid at the end of the month. There are more than twenty million workers in the UK alone, and their earnings exceed $3,000 per month. So they are issued with $60 billion at each month end. This is equivalent to about 6,000 tonnes of gold and is a figure achieved without taking into account any savings, or any of the substantial monetary floats required to support non-salary related corporate and government expenditure.

Yet the entire British central bank reserve is only about 400 tonnes, which shows that Britain (like any other western country) could not possibly underpin with gold the supply of its national currency necessary to support the prevailing level of economic activity, at least not without a massive increase in the pound sterling value of gold.

The Gold paradox

So gold cannot easily work as a basis for coinage unless its value falls substantially, while it cannot fully back national money systems unless its value rises substantially. Since one of the requirements of money is that it is divisible, i.e. that it can simultaneously be used in small multiples to buy small things, and big multiples to buy big things, it must be impossible for gold to operate widely at both ends of the monetary scale simultaneously.

In fact where it has been used as money, particularly in the larger economies of the modern world, it has tended to be partnered with another material, usually silver, in a system known as bimetallism. Invariably this suffered stresses because of the unavoidable fluctuations in the respective values of the commodity content of the money.

The idea sacred to the maddest gold bugs that gold should be the world's only universal money is wrong, simply because of the sums which prove that either at the small (coinage) end or at the large (bank payments) end there has to be an alternative form of money based on something else. History also shows them to be wrong - although not everywhere and not all the time.

The historical records show that gold is doomed only to repeat its temporary and peripheral role. But it is, nonetheless, a vital role, and when it comes back, it makes its owners the richest people around.

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