Money and markets: gold is no longer money and that’s a good thing

There are always new and exciting uses for materials, and gold is no exception. It has some applications in medicine. It’s a good reflector of heat, benefiting those who like their windows coated in bling and want cheaper air conditioning or  telescopes looking at infrared sources in deep space.

‘Gold is only good for electronics and dentistry’ say people who are happy to see the back of gold as money. Yet many consider it the very essence of what money is; anything that is not gold is a fake token representation of money. To the acolytes of the ‘gold standard’, money that isn’t gold or at least gold-backed is a confidence trick.

This is an utterly irrational position. However, gold is infused with emotion by human nature.

Gold is quite likely the first metal ever handled by man. It is found in elemental form and is not uncommon in situ. Humans would have discovered it in rivers early on in their development. It looks remarkable and is therefore easily spotted, it is quite easy to separate, it is very malleable and therefore workable with primitive tools, and it melts and pours at low temperatures.

Gold was made into decorative items and cups in prehistory and was clearly an important status symbol. It is not hard to see how it captured the imagination of our forebears and became a key ingredient in the process of human evolution.

Gold fever is real. I have seen people shake at the discovery of tiny flakes of gold in a gold pan and lose their poise when someone has found gold items of little material value. People have a visceral relationship with gold like no other material.

Gold as a unit of exchange goes back to the dawn of money and first appears as small musket-ball-like lumps. The Greeks were the first to stamp images on this money, and gold coins became a global phenomenon.

Today gold is not money, its position in monetary affairs being limited to central bank reserves. As money, it often became a limit on economic expansion. This is because while physical gold is only a fractional representation of the monetary base, if the growth of the global economy is outstripping mining, a lack of gold strangles growth. Without enough golden liquidity in the economic plumbing, it is hard for commerce to transact and – unlike paper or electronic money – more cannot be created at a stroke.

Gold is held by its proponents as being a stable base for money, but this is not true. Any change in the supply or demand of goods or gold will unbalance a system based upon it. For example, the discovery of vast troves of gold by the Spanish in South America sparked significant inflation in Europe.

Gold’s fallen from being money. It is an inflexible standard and in a sense undemocratic. When it held sway in the 1800s it was said that commerce and the people were crucified on a cross of gold, because economies were bound to the holders and miners of gold, not the will of elected politicians. Some would have preferred it to stay that way.

Gold is an insecure form of money, needing to be kept safe in physical vaults. It gets lost and it is said most historically mined gold has already been dropped and dispersed back into the ground. What’s more, gold’s supply is limited by technology’s ability to extract it and that process is costly,  especially environmentally: a ton of earth needs to be processed to extract 1g of gold.

There is not enough gold for the world’s monetary needs. With just $7,000 billion in existence, it is only a tiny fraction of the $300,000 billion of mainstream paper assets that need a monetary interface to be exchanged.

Its value as money is high by volume. This means other metals need to be employed for small transactions. These other metals produce problems of arbitrage when one metal drives another from circulation.

In short, gold is not great money. It worked in the good old days, but now technology has moved on, it has lost its utility as cash and monetary base.

Yet gold is still the one and only money in a particular circumstance: war. This is why governments still hoard it. No one wants paper money from a potentially defeated side of a war, so countries need to have gold on hand should a major conflict break out. That is why they still keep gold reserves.

Now gold has a new competitor: Bitcoin. Bitcoin fans believe Bitcoin is digital gold: it’s incorruptible, takes huge amounts of energy to extract, is internationally accepted, can’t be debased by enemies and is backed by the laws of nature: chemistry and geology for gold, and maths for Bitcoin. Previously, in times of trouble, fiat money ran into gold and pushed its price up; now money appears to run for Bitcoin. When tensions rise, where gold would have rallied, Bitcoin now is seen rising instead.

‘Gold bugs’ believe gold will once again become money, zooming in value to hundreds of thousands of dollars an ounce. There is no chance. Gold’s use in electronics will keep it precious, though, and until our species loses its lust for gold fitments, gold will still hold sway over minds, obsessed by sex appeal and status.