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December 26th, 2008
This article was co-authored by Hristo Assenov at the Prince Sultan University in Saudi Arabia.
A New Stage in Gold's Return to Money
During December gold appears to have entered a new stage in its return as money. We recently observed a very interesting development in the prices of gold bullion coins that has important monetary implications. Not long ago bullion coins traded with some price differences - see the first table below. Interestingly enough, just recently, the listed bullion coins now trade with one price.
Here is a table of cross-pricing for the various coins from a few months ago:
And here is the current pricing of various gold coins from the very same source:
Our source of this pricing information is USAGold, a full-service coin and bullion dealer located in Denver, Colorado. Their web site is www.usagold.com; the link to the pricing shown above is http://www.usagold.com/gold/price.html.
So, what is the economic interpretation of this recent "one-price" development and is it significant? Basically it means that gold buyers are no longer sensitive to the shapes of and the images on gold coins; instead, they are interested in their weight. And since their weight is the same, the paper price that they are willing to pay is also the same. The view of the sellers must also be similar if all the prices are to be identical.
Thus, the shape and the form of the coin are no longer as important as its weight. Whether it is a one-ounce gold coin with an image of a bearded man or a one-ounce gold coin with an image of a flying eagle, it is still one ounce of pure gold. Now, their value is perceived to be the same, and so are their prices in terns of paper money.
So, what is the economic significance of this development? Basically, a single price for all major one-ounce gold bullion coins is a significant sign that gold is regaining its function as money again. However, we are not saying that gold has returned today as money; we are only saying that there is strong anecdotal evidence that the monetary system has evolved today into a new stage, where gold is now much closer to money than a few months ago.
Recent backwardations in the gold futures pits would provide another similar indication of an important monetary development. Although occasional backwardations are not in any way directly related to the current one-price development, the fact that both occurred in a very short period of time (December 2008) is probably not a coincidence. However, it is likely that both developments are driven by the evolution of the same underlying global monetary processes.
The explanation is straightforward. For it, we need to explain the basics of money as understood by the classical and the Austrian schools of economic thought. Basically, money is very simple to understand -- it is a commodity that facilitates the indirect exchange in human society. One person exchanges his products or services for another good that is not needed directly for its benefit of consumption, but for one that will be later used for exchange for something valued for its pure consumption, such as bread, eggs, or gasoline. This is an indirect exchange that has been facilitated by an intermediate good, which others will accept as a payment; this intermediate good is technically knows as a "medium of exchange", and widely known simply as money. This intermediate good needs to be very marketable and demanded in society, so it could be easily traded for any other good. While historically many goods have served as money, such as tobacco, sugar, iron, copper, shells etc, over the centuries gold and silver have emerged as the dominant commodity used as money that have eventually displaced all other commodities. Money allows indirect exchange, which in turn allows for specialization, increased productivity, and rising standards of living.
Since money historically has emerged as a commodity, its weight is has always been more important than its shape or form. This is actually still the same with paper money today - whether you have a brand-new, nice-smelling $100 bill hot from Helicopter's Ben printing press or five crumpled, old, ugly, twenty dollar bills, it is still all the same, just 100 dollars. So it is with gold - when gold functions as money, whether you have new bars, old coins, gold dust, whatever, the only thing that counts is the quantity of pure gold; just like in paper dollars, where the only thing that counts is the quantity of dollars. Thus, for gold only its weight and purity matter, i.e. the quantity of pure gold.
Under the current financial order we use paper tickets with picture of a bearded man that are currently printed in the trillions by another bearded man. Those tickets have had no backing for many decades, so there has been no restraint in their printing. Up until recently, there has been a modicum of self-restraint in the printing process. However, since the Summer of 2008, all restraint has been thrown out of the window by the bearded man, aka Bailout Ben, who has indulged Congress and the Bankers in a historic multi-trillion dollar printfest. In response, common sense people have rushed into gold as a store of value. Now that the value of gold is driven entirely by its purity and quantity, it is only a matter of time before gold is used again as a medium of exchange.
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Disclaimer: The opinions expressed above are not intended to be taken as investment advice. It is to be taken as opinion only and I encourage you to complete your own due diligence when making an investment decision.
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