Deutsche Bank: Gold Is Money

What Do the Experts Say?

Deutsche Bank analysts Daniel Brebner and Xiao Fu  have just released a new report saying that gold is money (via Business Insider):

While it is included in the commodities basket it is in fact a medium of exchange and one that is officially recognised (if not publically used as such). We see gold as an officially recognised form of money for one primary reason: it is widely held by most of the world’s larger central banks as a component of reserves.

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We would go further however, and argue that gold could be characterised as ‘good’ money as opposed to ‘bad’ money which would be represented by many of today’s fiat currencies. In describing gold as such we refer to Gresham’s Law – when a government overvalues one type of money and undervalues another, the undervalued money (good) will leave the country or disappear from circulation into hoards, while the overvalued money (bad) will flood into circulation.

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In our view the ideal medium of exchange must balance the paradox of representing value while having little intrinsic value itself. There are very few media which can do this. Fiat currencies physically have no use other than that which is prescribed to them by government and accepted by the public. That fiat currencies cost little to produce is of a secondary concern and we believe, quite irrelevant to the primary purpose.

Gold is neither production good nor consumption good. Jewellery we see as a form of storage or hoarding (the people of Portugal have all but exhausted their personal gold stores – hoarded in the form of jewellery – having converted them to survive the crisis). If gold did have a meaningful commercial use we believe that it would make the metal less attractive as a medium of exchange as the value of the metal in whatever market it was used in could periodically interfere with its medium-of-exchange role…

Other characteristics are important of course in fulfilling the requirements for ‘good’ money: indestructibility, divisibility, transportability and universal acceptability.

They are not alone …

World Bank president Robert Zoellick pointed out in 2010:

Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today.

Former Fed chairman Alan Greenspan said in 2009:

Gold prices that jumped above $1,000 an ounce this week are signaling that investors are buying metals to hedge against declines in currencies, former Federal Reserve Chairman Alan Greenspan said.

The gains are “strictly a monetary phenomenon,” Greenspan said today at an investment conference in New York. Rising prices of precious metals and other commodities are “an indication of a very early stage of an endeavor to move away from paper currencies,” he said…

What is fascinating is the extent to which gold still holds reign over the financial system as the ultimate source of payment,” Greenspan said.

And we noted in 2010:

Alan Greenspan told the Council of Foreign Relations last week:

Fiat money has no place to go but gold.

Greenspan also said that supply and demand explanations treating gold like other commodities “simply don’t pan out.”

Greenspan also spoke of how, during World War II, the Allies going into North Africa found gold was insisted on in the payment of bribes, and said:

If all currencies are moving up or down together, the question is: relative to what? Gold is the canary in the coal mine. It signals problems with respect to currency markets. Central banks should pay attention to it.

Former chief Merrill Lynch economist David Rosenberg wrote in March:

The best currency may be physical gold…

Phoenix Capital Research argues that central banks are themselves loading up on gold because they know that the entire fiat money scam will soon collapse.

Indeed, it is fiat currency – and not gold – which is in a bubble.

As Bond king Bill Gross said recently:

Gold can’t be reproduced.  It could certainly be taken out of the ground in an increasing rate but there’s a limiting amount of gold.

And there has been an unlimited amount of paper money over the past 20 to 30 years and now – in this period of central bank expansion where it’s QE1 or QE2, or whether it’s the LTROs of the ECB or this potential new program … then central banks are at their leisure to basically print money.

Gold is a fixed commodity that has a considerable store of value that paper money has not….

When a central bank starts writing checks and printing money in the trillions of dollars, it’s best to have something tangible that can’t be reproduced, such as gold.

Forget Theory …  Are People Actually Accepting Gold as Money?

But forget all the theory.  Are people actually accepting gold as money?

Utah has declared gold coins to be money.

CNN reported in February:

A growing number of states are seeking shiny new currencies made of silver and gold.

Worried that the Federal Reserve and the U.S. dollar are on the brink of collapse, lawmakers from 13 states, including Minnesota, Tennessee, Iowa, South Carolina and Georgia, are seeking approval from their state governments to either issue their own alternative currency or explore it as an option.

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Unlike individual communities, which are allowed to create their own currency — as long as it is easily distinguishable from U.S. dollars — the Constitution bans states from printing their own paper money or issuing their own currency. But it allows the states to make “gold and silver Coin a Tender in Payment of Debts.”

Financial Times reported in 2010:

Intercontinental Exchange, the US futures exchange group, has followed rival CME Group by allowing its European clearing house to accept gold bullion as collateral for transactions.

JP Morgan accepts gold bullion as collateral.

So does Donald Trump.

China is paying for oil with gold.  India is probably doing so as well.

And central banks are considering allowing banks to hold gold as a risk-free, tier 1 asset.

Caveats:  Be careful with unallocated accounts, accounts held by big bankspaper forms of gold and tungsten (see this, this, this and this).

Finally, note that FDR was not the only leader to confiscate gold.  Gary North alleges:

When World War I broke out in 1914.  The banks suspended redemption of gold for paper money.  This broke their contracts, but the governments all ratified this action.  Then the governments had their central banks confiscate the gold that had been stored in the vaults of the commercial banks.

Hitler, Mao and Stalin also allegedly confiscated gold.

And in the Yuan dynasty six centuries earlier  – in an attempt to prop up its fiat currency and prevent runaway inflation – the Chinese government attempted to prohibit all transactions in or possession of silver or gold, which had to be turned over to the government.  (China has outlawed possession of silver several times since, and has just lifted the most recent ban.)

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  • jo6pac

    Yep and China buying gold at an unreal rate and so has Russia. Russia is the largest producer of gold and still they’re buying from the open market. Think Putin knows something is about to happen, they hold nothing that has anything to do with Amerika. They have stopped using the dollar for trade.

  • zigbed

    It’s going to be the end of the dollar as the world reserve currency. Game over for America. our world reserve currency status is all we have/had left. Tens of trillions of unwanted petrodollars rushing back into our economy will result in the rapid onset of hyperinflation, I believe.

  • http://chimaeraimaginarium.wordpress.com Richard William Posner

    Gold is not money. Gold is a commodity. Money is not a commodity. Money is a fiat of law.

    If gold is used to back a currency, the currency is not money. It is nothing more than a receipt for gold. A gold backed system is barter, rigged by those who own the gold.

    If the gold is confiscated by a “government” and its value is fixed by law, it is no longer a commodity and could be considered “money”; a fiat currency.

    The perceived value of gold, however contrived it may be, is not regulated. It is bought and sold, as if it were a valuable resource like wheat or corn. Its price must and does fluctuate radically over time and is subject to every manner of market manipulation. Since it is not being used as currency and therefore has no fixed value, a monetary system based upon it could only be wildly unstable.

    “So both Aristotle and Plato noted the paramount principle – that the nature of money is a fiat of the law, an invention or creation of mankind. This principle, part of a lost science of money, must now be relearned in the 3rd Millennium in order to achieve the monetary reforms needed to move back from the brink of nuclear disaster, to move away from a future dominated by fraud and ugliness, toward a world of justice and beauty.”
    Stephen Zarlenga, The Lost Science of Money

    “… Fiat money is not the problem – the private issue of fiat money is the problem, which is like a private tax on all society.”
    Stephen Zarlenga, Director, The American Monetary Institute

    As long as money is spent into circulation, debt free, by a government, not borrowed at interest from a private, for-profit corporation, maintaining a stable and equitable monetary system is a simple matter.

    “Once a nation parts with the control of its currency and credit, it matters not who makes the nations laws. Usury, once in control, will wreck any nation. Until the control of the issue of currency and credit is restored to government and recognized as its most sacred responsibility, all talk of the sovereignty of parliament and of democracy is idle and futile.”
    William Lyon Mackenzie King, the tenth Prime Minister of Canada from December 29, 1921 to June 28, 1926

    “The Government should create, issue, and circulate all the currency and credits needed to satisfy the spending power of the Government and the buying power of consumers. By the adoption of these principles, the taxpayers will be saved immense sums of interest. Money will cease to be master and become the servant of humanity.”
    Abraham Lincoln

    That conclusion and his intention to make it happen is what got him killed.

    “It is absurd to say that our country can issue $30 million in bonds and not $30 million in currency. Both are promises to pay, but one fattens the usurers and the other helps the people. If the currency issued by the Government was no good, then the bonds would be no good either. It is a terrible situation when the Government, to increase the national wealth, must go into debt and submit to ruinous interest charges at the hands of men who control the fictitious value of gold.”
    Thomas Edison

    GOLD BULLION, SOUP DU JOUR
    It doesn’t digest very well and has very little nutritional value. Nevertheless, everyone believes it’s good anyway.

    “Belief is the death of intelligence. As soon as one believes a doctrine of any sort, or assumes certitude, one stops thinking about that aspect of existence.”
    Robert Anton Wilson

    “Was it ever Feasible to Use Gold for Money?

    Aside from going counter to the true nature of money as an abstract legal power, there is a very practical matter that supporters of Gold money can’t address: There is never enough supply of gold sufficient for such a money system. The Gold supply has not kept pace with the growth of population and commerce. This periodically increased the real value of gold.

    Money systems usually solved this problem by cheating – pretending to be operating a gold based system but really mixing private bank paper into the money supply, pretending it was convertible; leveraging the amount of gold in the system through fractional reserves of one type or another.

    Because this bestowed great power and unearned wealth onto bankers, there has never been a shortage of apologists for such mixed systems – we call them “economists!”
    Stephen Zarlenga, Director, The American Monetary Institute

    “A gold standard or silver standard or any other finite, alternate “standard” akin to a precious metal monetary standard therefore can only fail altogether to sustain commerce requiring a greater circulation, to endow the circulation with truly consistent value, and to avert catastrophic failure as an inevitable consequence of interest:
    The finite quantity of any honored such standard cannot sustain industry requiring a circulation greater than available monetary reserves; Inevitable deficiencies regularly compromise / degenerate the purported standard into a fractional reserve.

    There is no fixed linkage between circulation, the potential value of existent property or services, and the declared monetary value of currency; Thus the purported standard imposes perpetual inflation and deflation in fluctuations of the ratio of circulation to wealth, much like the very improprieties it purports to address.

    Alternate standards such as the gold standard have no power whatever to arrest multiplication of debt by interest.

    As only eradication of interest arrests artificial multiplication of debt by interest, the gold standard is even wholly redundant to this purpose.

    In the first two cases then, the gold standard is actually an obstruction to the very thesis of monetary propriety; and in the third it is wholly redundant.

    Thus, not only is there no need or use for a gold standard whatever; in the first and second cases the gold standard is substantially damaging, and in the last it is nothing but a delusion that it can protect us from the worst calamity of all.”
    People for a Mathematically Perfected Economy

    “Gold is not vital to human existence; it has, in fact, relatively few practical uses. Yet its chief virtues—its unusual density and malleability along with its imperishable shine—have made it one of the world’s most coveted commodities, a transcendent symbol of beauty, wealth, and immortality.

    From pharaohs (who insisted on being buried in what they called the “flesh of the gods”) to the forty-niners (whose mad rush for the mother lode built the American West) to the financiers (who, following Sir Isaac Newton’s advice, made it the bedrock of the global economy): Nearly every society through the ages has invested gold with an almost mythological power.

    Humankind’s feverish attachment to gold shouldn’t have survived the modern world. Few cultures still believe that gold can give eternal life, and every country in the world—the United States was last, in 1971—has done away with the gold standard, which John Maynard Keynes famously derided as “a barbarous relic.”
    National Geographic, Published: January 2009

  • http://chimaeraimaginarium.wordpress.com Richard William Posner

    Admin: it would be very helpful if one could access a preview of comments for editing purposes before they are “carved in stone” by posting.

  • John B.

    In regards to Richard William Posner´s comment, I generally agree with you. The only thing I can add is that gold was as least good in the form of gold standard. It was a bubble, but the bubble was not as big as we can observe now. Money has become a principal objective of our existence. It replaced all real value. Now, production is just a part of corporate gains (I think I read 20 per cent). The rest is speculation, financial products (which are often of no good value as you can see in Seven Caveats with Bank-Owned Mortgage Insurance Coverage).
    McMurtry goes even further and describes current financial system as cancerous. It destroys life – mining, transportation, poor people, nature in its ultimate quest for money.

    • http://chimaeraimaginarium.wordpress.com Richard William Posner

      “…gold was as least good in the form of gold standard.”The word “standard” implies a certain degree of stability. Stability is not generally a characteristic common to a commodity, such as gold, being bought and sold by profit seekers in the ostensibly “free” market.If taken off the market and standardised for use as a legal medium of exchange, a commodity becomes a fiat currency. Money cannot be both a commodity and a fiat of law simultaneously. You can have money or you can have a commodity. You can’t combine the two.I agree completely with your observations regarding money as the “principal objective” of “western” Life. Edward Bernays would doubtless be very pleased.What I find most maddening about this system is the way in which it rewards the most venal, deceitful and non-productive of parasites whilst punishing those whose labour actually sustains human Life on Earth.Mr. McMurtry, whoever he may be, is being kind in describing capitalism as “cancerous”.

  • John Jauregui

    This will end badly.

 

 

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