Gold was money in the distant past and it will probably be money in the distant future, but there is no developed economy in which gold is money today. In this post I’ll explain why.

People who argue that gold is money often confuse what should be with what is. They explain why gold-money would be vastly superior to any of today’s fiat currencies and their explanations are probably 100% correct, but they are sidestepping the issue. There is no doubt in my mind that gold is far better suited to being money than something that can be created at whim by commercial banks and central banks, but the fact is that gold is presently not money.

Part of confusing what should be with what is sometimes involves the claim that governments can’t determine what is and isn’t money. This is akin to someone claiming it can’t rain while standing in the middle of a rainstorm.

The hard reality is that governments routinely do many things that they shouldn’t be able to do. Governments shouldn’t be able to force people into slavery, but they sometimes do it. They call it conscription or the draft. Governments shouldn’t be able to steal, but they do it on a grand scale every day and call it taxation. Governments shouldn’t be able to monitor almost all financial transactions and most internet communications, but they do. They call it national security or keeping us safe from terrorists and drug traffickers. Governments, either directly or via their agents, shouldn’t be able to siphon away the purchasing-power of savings and wages, but they do it under the guise of economic stimulus. Governments shouldn’t be able to put obstacles in the way of peaceful, voluntary transactions, in the process greatly increasing the cost of doing business and thus reducing living standards, by they do it every day and call it regulation. One particular government (that of the US) shouldn’t be almost continuously intervening militarily in multiple countries around the world, but it is. They call it peace through strength or keeping the world safe for democracy.

So, please don’t insult my intelligence by asserting that governments don’t have the power to determine what is money!

Another common mistake made by people who argue that gold is money is to emphasise gold’s store-of-value (meaning: store of purchasing-power since value is subjective and therefore can’t be stored) quality. However, there are many things that have been good stores of value that obviously aren’t money, so acting as a store of value clearly isn’t the defining characteristic of money.

Which brings me to a critical point: Before you can logically argue whether something is or isn’t money, you must first have a definition of money. And since we are dealing with something that affects everyone, the definition must be practical and easily understood.

The only practical definition of money is: the general medium of exchange or a very commonly used means of payment within an economy. By this definition, gold is not money in any developed economy today. By this definition, the US$ is money in the US, the euro is money in the euro-zone, the Yen is money in Japan, the Australian dollar is money in Australia, etc.

Once something is the general medium of exchange it will generally be used as a unit of account. The unit-of-account function stems naturally from the medium-of-exchange function. Also, for something to be good money it should be a good long-term store of purchasing power, but, as noted above, being a good long-term store of purchasing power is clearly not the defining characteristic of money. Being a poor long-term store of purchasing power would almost certainly preclude something from being money in a free market, but we do not currently have a free market. Do not confuse what is with what should be!

Now, I acknowledge that it is possible to concoct definitions of money that lead to the conclusion that gold is money, but such definitions either aren’t practical, or are focused on a characteristic of gold that is shared by some obviously non-monetary assets, or are simply wrong.

In conclusion, if something is money then the average person will know it is money because he will be regularly using it as a medium of exchange in his daily life. In other words, money cannot be a secret to which only an elite group is privy. Gold is therefore not money at this time. If it were, we wouldn’t be in such a precarious economic situation.

So if gold isn’t money, then what is it? That’s an interesting question that warrants a separate post.

The US stock market successfully tests its low

I wrote in a TSI commentary published on Sunday that the S&P500 Index (SPX) appeared to have completed a successful test of its 24th August low early last week. This view meshed with the price action and the fact that by some measures, most notably the Investors Intelligence Bull/Bear Ratio, last week’s test occurred in parallel with extreme negativity.

More evidence of a successful test of the low emerged on Monday 5th October when the number of individual stocks making new 52-week lows collapsed while the number of individual stocks making new 52-week highs rose significantly on both the NYSE and the NASDAQ.

The SPX is now less than 1% from substantial resistance at 2000. I suspect that this resistance will cap the SPX’s rebound for now, but that it will be breached before year-end. Based on a number of long-term indicators, I also suspect that the July-September downturn was the first leg of a cyclical bear market and that several months of range-trading will be followed by a decline to well below the 24th August low.

The gold-mining indices are finally showing signs of strength

The gold-mining indices broke out to the upside last Friday. Furthermore, the breakout was solidified on Monday when the HUI/gold ratio closed decisively above its 40-day MA for the first time since April.

The breakout could still be a ‘head fake’, but it should be given the benefit of the doubt until proven otherwise.

Kinross Gold (KGC), the most under-valued of the major gold producers, broke above the top of a well-defined intermediate-term price channel on Monday. Based on this price action my guess is that it will rise to around US$2.40 within the next three weeks.

Ben Bernanke, Master of Tautology

Former Fed chief Ben Bernanke has apparently argued that poor productivity has held back growth in the US. This is like arguing that growth has been held back by a lack of growth, since the ONLY way that per-capita economic growth can happen is via an increase in productivity.

As a run-of-the-mill Keynesian, Bernanke is clueless about how fudging interest-rate signals and creating money out of nothing make an economy less efficient. If he had a clue he’d be arguing that the Fed has held back growth in the US.

This post is an excerpt from a recent TSI commentary.

Excited talk of a silver shortage has made its annual reappearance. This talk is always based on anecdotal evidence of silver coins or small bars being difficult to obtain in some parts of the world via retail coin dealers. It never has anything to do with the overall supply situation.

Shortages of silver and gold in certain manufactured forms favoured by the public will periodically arise, often because of a sudden and unanticipated (by the mints) increase in the public’s demand for these items. Furthermore, the increase in the public’s demand is often a reaction to a sharp price decline, the reason being that in the immediate aftermath of a sharp price decline the metals will look cheap regardless of whether they are actually cheap based on the fundamental drivers of value.

These periodic shortages of bullion in some of the manufactured forms favoured by the public are not important considerations when assessing future price potential. The main reason is that the total volume of metal purchased by the public in such forms is a veritable drop in the market ocean. For example, the total worldwide volume of silver in coin form purchased by the public in a YEAR is less than the amount of silver that changes hands via the LBMA in an average trading DAY.

If gold continues to rally over the weeks ahead then silver will also rally. By the same token, if gold doesn’t rally over the weeks ahead then neither will silver. In other words, regardless of any anecdotal evidence of silver shortages at coin shops, silver’s short-term price trend will be determined by gold’s short-term price trend. Furthermore, if the gold price rises then the silver price will probably rise by a greater percentage, the reason being that the silver/gold ratio is close to a multi-decade low (implying: silver is very cheap relative to gold).

A final point worth making on this topic is that the claims of silver or gold shortages that periodically spring-up are not only misguided, they are dangerous. This relates to the fact that the most popular argument against gold and silver recapturing their monetary roles is that there isn’t enough of the stuff to go around. The gold and silver enthusiasts who cry “major shortage!” whenever it temporarily becomes difficult to buy coins from the local shop are therefore effectively supporting the case AGAINST the future use of gold and silver as money. You see, a critical characteristic of money is that obtaining it is always solely a question of price.

Comments on the following charts will be emailed to TSI subscribers.

1) Gold

2) The HUI

3) The Dollar Index

4) The S&P500 Index (SPX)