Gold: a currency, not a commodity

Gold is useless, hence it should be worth nothing, right? Wrong.

I'm baffled by critics of gold. Arguments that it is a shiny lump of uselessness completely miss the point. Gold has, since the earliest civilisations, played a role as a store of value, a unit of account and a medium of exchange. In other words, it's long been a currency.

In fact, it's the longest continuous form of currency our civilisation has known. Paper currency itself was invented as a way of facilitating gold payments. The modern method of using paper money unbacked by gold has just a 50 year history. It is an experiment still unfolding.

Those that say gold is useless miss the point. A currency is supposed to be useless. Currencies work not because they are useful, but because they are scarce and people believe in their value.

All currencies are therefore built on fiction. The difference between gold and paper money is that geology limits the supply of gold while all that stands in the way of limitless paper are the imaginations of central bankers and the quantity of ink.

The history of paper money does it no favours either. Everywhere it has been used, it has been abused. If you think the US Fed is any more responsible than its predecessors consider this: The US dollar retains just 5% of the purchasing power it had a century ago. The Fed's QE program may be necessary but it comes with consequences. Paper money will bear the brunt of the cost.

Critics of gold will do well to remember the counsel of Voltaire; 'all paper money eventually returns to its intrinsic value: zero'.

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