I spent most of my professional life studying the nature of money, finally concluding that it’s not a thing at all.
Money is an intermediary in the exchange of value. It’s not value itself. It’s a verb.
Gold was once considered money because it was a good intermediary. It was rare and portable. It was attractive and easily understood by most people. But if Aladdin emerged from a nearby cave with tons of gold, the value of gold would plunge. Gold is, in the end, a commodity.
So far in 2018, the price of gold has held up better than the price of stocks but most analysts understand its value is tied to its use as a commodity, not a currency.
Despite this, you may be reading that many investors are now buying Exchange Traded Funds (ETFs) tied to gold, worried about the international situation.
They’re also buying bitcoin.
Gold Doesn’t Hold Up
During the last five years the SPDR Gold Shares ETF (NYSEARCA:GLD) is down about 5%, while the Dow Jones Industrial Average is up 60%. GLD has not felt the market wobble that began in late January, and since January 26 is only down 3% against a Dow drop of 7%.
Of course, you can plot out graphs across any distance in time to prove almost anything. Consider the value of GLD over the last three years, compared to the Dow Jones Industrial Average and the Bitcoin Investment Trust (OTCMKTS:GBTC), a mutual fund tied to bitcoin. They’re all within 1% of each other, and within 1% of even as well, although GBTC is far more volatile.
Gold does have advantages as a store of value. New supplies can be estimated accurately, as can demand for jewelry and electronics. It is fungible, and can be exchanged for any currency, or bartered directly for goods.
Bitcoin has many of these advantages. The total number of answers to the bitcoin puzzle is limited. Given that it exists only in a computer, it is highly transportable, and can be exchanged for any currency. It can also be bartered for goods.
But that doesn’t make bitcoin money. That makes bitcoin a commodity, one with a total market cap of $159 billion as of May 10. The world’s gold supply is worth over $7 trillion.
What Makes Gold Useful
What makes gold useful today is that $7 trillion market size, which is half the market cap of the NASDAQ. But gold is also like Roman Numerals, unwieldy and limited. The largest Roman Numeral was M for 1,000, so once numbers got serious they also got impossible. The same thing happens if you try to travel with, say, 50 pounds of gold in your pocket.
Gold can stand in for small values, in a pinch. A few ounces will carry value in any country where you find yourself. But any more than that and you’re going to be weighted down. Land in any civilized country and you’re better off carrying a bitcoin wallet.
The Bottom Line
The price of gold peaked in late 2011, at slightly over $1,800 per ounce. It currently sits at about $1,354, midway between that and its January 2016 low of under $1,100.
That, however, is only its price against one currency. Measured against the ruble, gold looks better. Measured against a collapsed currency like that of Zimbabwe or Venezuela and it looks even better, if you can keep it safe.
It’s safety, and life, that’s the real store of value. If the global economy collapses, that will be all that matters.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at [email protected] or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.