gold

Gold Is Not Money – It’s Something Better

by Tom Luongo, SeekingAlpha.com  |  published on January 21, 2013

In the comment thread to my last article I made the mistake of puncturing a misconception of many an ardent, if confused, gold investor by asserting without equivocation that gold (AMEX:GLD) is, in fact, not money. I know I made some people angry with that statement. But to clarify I need to set the Way-Back Machine to last century and quote from Ludwig von Mises’ The Theory of Money and Credit and Human Action wherein he defines money and credit.

Money:

It is the most marketable good which people accept because they want to offer it in later acts of impersonal exchange – Human Action (1949)

Credit:

Credit transactions are in fact nothing but the exchange of present goods against future goods. – Theory of Money and Credit (1921)

To translate: money is the most liquid commodity. Credit is a promise to pay tomorrow for what I need today. Mises also went on to explain that the creation of more money confers no net benefit – just picking winners and losers based on who created the money. This is because money is not a store of value. Nothing is; not cowrie shells, gold, Bitcoins or Malaysian Ringgit. Money can only compare subjective values.

Let Them Eat Credit

Gold is capable of comparing values. All things are at some level. But all other things do so at a discounted rate versus the current item being used as money, because holding money should not incur any cost. Gold has a discounted price when trying to buy a car with it. That discount is 100%.

Gold is only money in transactions where the transaction is not allowed to take place with legal tender – think Iranian oil and you just won a prize. In that respect gold is money. In Singapore, bullion quality physical gold and silver (AMEX:SLV) trade without taxes or capital gains which puts gold and silver on par with other currencies in the foreign exchange market. Up until recently, one could deposit gold in a Vietnamese bank and get paid interest on your savings. In only very limited circumstances and markets does gold flow as a money – a direct medium of exchange.

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