The term “money” is generally defined as a medium of exchange. Sometimes you will see “store of wealth” added to the definition of money. One trait of money should be that it can be used as a store of wealth. But just because something is a good store of wealth doesn’t make it a good form of money.
In the United States, the U.S. dollar is the primary form of money. In fact, it is really the only money that is used.
Gold bugs often make the mistake of saying that gold is money, but this lacks accuracy. Gold has a long history of serving as money, and gold would likely still serve as money if not for the monopoly powers of the central government and central bank.
In a few countries, gold may serve as a secondary form of money. It has been used in Zimbabwe since the hyperinflation there, but so have dollars and euros.
In the U.S., the dollar is money because it is widely sought and widely accepted. You can walk into any store and use your dollars, whether in actual currency form or digital. You cannot walk into your local grocery store and pay with gold. They would look at you as if you were nuts. The same can be said for Bitcoin.
But just because the U.S. dollar reigns supreme right now, it doesn’t mean it will always be this way. It also doesn’t mean that it is the best investment.
When comparing the U.S. dollar with gold and Bitcoin, they all have their unique characteristics. You can invest accordingly.
Rosland Capital has put out a chart comparing these three assets based on 10 different traits. Partly based on this gold-backed IRA page, it shows how each asset rates according to each trait.
It is actually gold that dominates the comparison. This is why the marketplace has favored gold as a form of money for thousands of years. It is only in very recent history that central banks and fiat currencies have dominated.
The most important trait where the U.S. dollar dominates is spendability, as mentioned above. This is why the dollar is money and why it is in such high demand.
In terms of investing, the dollar rates at the bottom when it comes to scarcity. There is no technical limit on the number of dollars (or digits) in circulation. The Federal Reserve could decide tomorrow to create another one trillion dollars out of thin air. This is why the dollar has lost over 95% of its value over the last one hundred years.
So while the dollar is still highly desired for its spendability and its liquidity, it has actually not served as a good store of value over time. And the only reason it has ever been highly desired is because it has essentially been forced on us by legal tender laws and other laws.
Bitcoin scores better than the dollar in several categories, but it is certainly not money. Sure, there may be a very small number of online stores that will accept Bitcoin, but it is not widely accepted. In fact, you can randomly ask people on the street, and many will not have even heard of the digital currency. Also, when bitcoins are spent on a purchase, they are often converted back into dollars.
As an advocate of liberty, I can certainly appreciate Bitcoin and the whole idea of digital currencies. Any competition for the central banks is a positive development. However, most people do not understand Bitcoin if they even know what it is. And Bitcoin does not have the history or reliability that gold does.
While gold does not rank high in a few categories, some of these would be solved with widespread use, coupled with today’s technology. For example, gold does not rate high in security, portability, and divisibility, but this could easily be resolved in the marketplace. It is not hard to imagine having credit and debit cards with gold payments. It is not hard to imagine a currency that is backed by gold. It is not hard to imagine mixing small amounts of gold with cheaper metals for lower value coins. There are any number of possibilities with today’s technology.
The one area where gold still loses out to the dollar is in actually using it as money (referred to as spendability in the chart). This is a result of the government and central bank taking over and controlling the money we use. The Fed has only been around for just over a hundred years. The last link the dollar had to gold was cut off 45 years ago. Since that time, inflation has been horrendous.
It may seem that the price of gold is quite volatile, and it is when pricing it in dollars or any other fiat currency. But this is more of a reflection of the volatility of the currencies. The price of gold jumps around due to announcements from the Fed and other central banks, or from speculation from investors trying to guess what the Fed will do next. And like any other asset class, gold is subject to booms and busts induced by the Fed’s monetary policies.
In conclusion, gold is not in high demand for it to serve as money. If it is in high demand at all, it is because it serves as a good store of wealth. It is an insurance policy against a depreciating currency.
Gold may yet again serve as money for our society as people realize that central banks have destroyed their currencies. Until that time, it is still smart to hold some gold and gold-related investments, as the destruction of the dollar and other currencies will not stop.