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  • Gold – and the jobs money does

    18 April, 2024

    Money is an odd thing. Like language, it is something we use every day, but when you start asking questions about it, difficulties arise almost immediately. How do you define money? How is it created? How does its value change, especially with respect to inflation?

    Rather than getting caught up in definitions and origin stories, it is perhaps much easier to look at the jobs money does, and how well different types of money (of which there are many) perform their given roles.

    Generally speaking, the things we use as money have three main jobs – a system of account, a means of payment and exchange, and a store of wealth. It is with respect to the latter two that questions about the usefulness of gold, especially as a store of wealth over time, come to the fore.

    In any economy, there are two basic choices – consumption or saving. Consumption is an act in the present for the present, and reflects the economy’s basic function, that of subsistence. Once subsistence is taken care of, we can think about saving – an act undertaken in the present with an eye to the future.

    It is no coincidence therefore that the jobs money does reflects these ‘now or later’ economic choices we are faced with. Money as a means of payment and exchange helps to effect our consumption choices in the present. As a store of wealth, money helps us anticipate our future needs and desires.

    When we acknowledge this temporal framework for money, we can then ask how well a particular type of money does the jobs asked of it. One way of measuring this is through inflation and deflation. Inflation – too much money chasing too few goods – suggests money’s job as a means of payment and exchange for consumption has become dominant. Conversely, deflation suggests saving, the delaying of consumption to the future, is in the ascendancy.

    The post-1971 economic period, following President Nixon’s closing of the gold window, has been one characterised by almost continuous inflation. Notwithstanding central banks’ 2% inflation targets, this suggests the fiat money system is one which allows money’s role as a means of payment and exchange to dominate.

    It is notable that during the same period, the price of gold in dollars has risen from the fixed $35 per ounce level of the Bretton Woods era to around $2000 at present. While gold isn’t currently used as a means of payment on a day-to-day level, this rise in price suggests its ability to fulfil the role of a store of wealth for the future remains undiminished – especially when judged in terms of national currencies, which have a tendency to inflate as the monetary base grows with credit expansion and increasing government debt.

    In what unfortunately seems to be an era of growing international conflict and uncertainty, recent record central bank buying of gold suggests the metal’s role as a reserve asset and a superior monetary store of wealth is once again coming to the fore. 

    Retail gold flows suggest investors in the East are well aware of the monetary metal’s value, and it seems like only a matter of time before investors in the West reacquaint themselves with gold’s benefits as part of a diversified investment portfolio and start to make asset allocations to reflect this.



    Charles Crowson is a former macro portfolio manager and author of ‘Jam Tomorrow? Why Time Really Matters in Economics’.