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Is the Gold Price Acting as a Currency?

Gold may be considered by many a commodity, but the Gold Price is not subject to normal supply and demand conditions...

MOST READERS will have a view as to whether gold is a currency, commodity or something rather more, writes MineWeb's Lawrence Williams. 

A recent analysis by Julian Jessop, chief global economist for London-based consultancy Capital Economics, comes down pretty firmly on the side of gold being, in effect, a currency – at least for the moment – and one which, as such, will continue to outperform other currencies, particularly while global economic turmoil persists, or indeed escalates. Indeed he sees gold as set to climb well above $2,000 – but on an unspecified timescale.

The analysis looks at three key elements which give gold its currency status:

  1. It can be seen as a universal currency as it is not issued by a government or other sovereign entity and even if its day to day use as a medium of exchange might be considered limited in, say, the retail sector, it may still be acceptable as payment for some particularly large transactions, or as collateral.
  2. Gold, up until recent years, has been used directly as a currency – and can still be so – in the same manner as perhaps the US Dollar has been an accepted means of payment in many countries over their own official currencies because it is seen as having a more stable backing. How much more so does gold meet this criterion?
  3. "Above all", reckons Jessop, "gold has a superior claim as a store of value, which is the third crucial function of a currency (in addition to a medium of exchange and a unit of account). When people talk about the Dollar being a proper currency, what they are typically describing are actually intrinsically worthless pieces of paper or numbers in an electronic bank account."

Jessop points out that the fact that gold does not represent a claim on any particular issuer means that it can thus be seen as a universal currency that transcends borders – and it certainly seems to be performing as such in the current global economic scenario.

Indeed, the fact that the Gold Price usually moves contrary to the strength of the US Dollar suggests that many do view it as a currency against which the Dollar itself is valued – hence the impression that governments and central banks do try to step in and mitigate Gold Price rises in the same way they may step in to try and control, or alleviate, major currency movements if these are seen as potentially destabilizing.

Commodities also tend to move in parallel with the perceived state of the economy, whereas gold frequently moves contrary to this.

It does seem to this observer that the economic establishment tries to brand gold as a commodity, and thus claim it to be subject to normal supply and demand issues, whereas this patently is, more often than not, not the way the yellow metal behaves at all. To a great extent this is probably because to the theoretical economist gold is an anachronism (Keynes' 'barbarous relic'), and to the bankers it is largely something which moves outside their direct control. You can't print more gold to expand the money supply and given that it offers, in effect, a critique on the central bankers' handling of the monetary system which they cannot do more than influence in a very limited manner, they don't like it.

Even so, central bankers for the most part do not let their gold holdings get diluted, as witness the recent German pronouncements that the country's gold reserves are sacrosanct and won't be used to help finance any Eurozone bailout. Overall central bankers worldwide have been increasing their gold holdings of late – they don't hold copper or platinum as part of their reserves for example, another indicator they view gold differently despite any statements to the contrary.

So, if central banks hold gold in the same way they may hold US Dollars they do at least see it as the 'collateral' part of being a currency if nothing else.

Coming back to Jessop's analysis: "If gold is not a currency, what is it?" he writes. He notes that because gold does not pay interest or dividends which makes it hard to put a precise value on it, but with current interest rates close to zero (and effectively negative), and likely to remain so for some time to come, yet another difference between gold and the Dollar has been minimized.

With demand for safe havens in the light of the Eurozone crisis currently being the key currency driver, then his view is that gold is likely to continue to outperform for the foreseeable future.

Overall, the conclusions would seem to suggest that gold is in reality some kind of hybrid, but its monetary connotations are very much to the fore in times of economic turmoil and in this age of fiat money.

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Founded in 1999 as part of the Johannesburg-listed MoneyWeb media group, Mineweb is one of the world's leading sources of mining and metals-investment news, comment and analysis. Managed since 2003 by professional mining engineer Lawrence Williams – formerly of Mining Journal, and with more than 30 years' technical and financial experience in the sector – MineWeb provides thorough, international coverage of the natural resources industry.

See all MineWeb articles.

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