Is gold a commodity, an investment, or money?
Gold is all of those things.
At times, it behaves like a commodity, following the ups and downs of commodity indices. At other times, gold is viewed as a safe-haven investment. When there is market turmoil, investors flock to gold because it is ‘old money’.
Right now, gold is behaving more like money than a commodity or an investment. Central banks have consistently devalued currencies since the market crash in 2008.
That’s a big deal because it shows that people around the world are losing confidence in paper currencies.
What indications are there that gold is behaving like money?
For one thing, gold’s price action has diverged from the price action of other commodities. This divergence first appeared in late 2014, but has become more pronounced in recent months.
Right now, as investors around the world lose confidence in a long list of emerging-market currencies, preferences are shifting toward US dollars and gold. This accounts for gold’s out performance of the rest of the commodity complex when measured in US dollars.
And when the price of gold is measured not in US dollars but in rubles, yuan or rials, the percentage price increase in gold is even more impressive, because those currencies have all declined lately against the US dollar.
When you understand that gold is money and competes with other forms of money in a jumble of cross-rates with no anchor, you’ll understand why the whole monetary system is going wobbly.
It’s important to understand that all currencies are just one form of money.
It’s not necessarily the best for all investors in all circumstances, but gold is a strong competitor in the horse race among various forms of money.
Lost confidence in fiat money starts slowly, building rapidly to a crescendo. The end result is panic buying of gold and a price super-spike. Why? Because gold doesn’t have a central bank and associated risks. In addition, gold always inspires confidence because it is scarce, tested by time, and has no credit risk. That’s why investors tend to flock to gold during times of uncertainty.