Deutsche Bank: Gold Is Money [washingtonsblog]


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 …

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