Why gold cannot be used as a currency

0
149

Gold is the oldest precious metal known to mankind. To some it is a treasure to be locked away to others it is a necessity. It represents wealth and financial stability. Its price fluctuates like other commodities and forms of exchange like the American dollar or the Euro. However, even though it is so valuable, it is still not currency. 

There was a time when gold was used as currency throughout civilisation. The U.S dollar was also once guaranteed by using gold. However, that was over a century ago. 

Why Gold Isn’t Considered Currency?

Gold does not meet the modern economic definition of “currency” and it probably never will. Something is considered to be currency if it meets the basic functions of money. This means that it has to be durable, portable, and hard to duplicate. Most of all it has to be a store of value. 

The reason that people have to think about whether they should buy bullion bars or coins comes down to how portable the form of gold you end up choosing. Think about what money does. Paper currency can be carried around in a wallet or it is available digitally when transferred by swiping a plastic card. It would be hard to use gold bullion as a payment mechanism like one would use cash. 

It’s impossible to use gold as currency with modern payment mechanisms.

The purer the gold, the more fragile it is. It might look like a strong material but it isn’t particularly durable. Under normal-day-today stress pure gold or gold bullion which is made from 99.99% pure world crumble. 

Gold can be easy to duplicate

Lots of people have tried and succeeded in passing off counterfeit gold as the real thing. It is important that when you buy bullion you should insist on buying it from a reputable dealer. Compared to paper money, a skilled counterfeiter could find it easily duplicate gold which is why it is important to know how to test gold. It takes cutting-edge technology and a lot of knowledge to try and duplicate government-issued currency. 

Money is supposed to act as a unit of account

Currency acts as a unit of account. When you go through a bank system you can see the amount that was deposited, the amount is withdrawn, extra charges, and the available balance. 

Gold is difficult to use as a unit of account. If you have to pay using gold determining how much gold can be compared to actual currency in financial transactions may be difficult. 

The price of gold fluctuates a lot

The gold price fluctuates erratically. It is too dependent on supply and demand dynamics. If gold was used as currency, shortages would be inevitable since gold is a precious metal but only a finite amount of it is available. Because the price is susceptible to geopolitical tensions, inflation, recession and a lot of other factors Gold is too unstable to be used as actual currency.

Understanding the Gold Standard

It’s virtually impossible to discuss gold and currency at the same time without talking about the gold standard. The gold standard was a monetary value system that linked currency to the gold value. The standard currency used was gold and paper notes could be redeemed for actual physical gold coins.

When the gold standard was being used, countries based the value of their money on a particular amount of gold. For instance, if the price of gold was $500, the value of the U.S dollar would be 1/500th of an ounce of gold. When it was set up, the Gold Standard Act was enacted to regulate the amount of money the government could print. One of the benefits of the system was that it would limit inflation and in so doing, led to a certainty of trading internationally. Countries could use gold to do pretty much anything from settling debts to funding wars. 

Gold was too volatile as a currency and experts did not believe that it couldn’t survive today’s economic climate if it was used as a currency. However, buying gold can help secure a person’s financial future. It might not be a good idea to use gold as currency but it is what a clever investor would put their money into.