Is gold really just an old-fashioned relic? In an age of technological advances, could gold become obsolete as a form of money?
Gold is money
Gold has historically been considered to be money because of the following unique properties
- Store of value
We can all agree that gold is money. In fact gold has been considered to be money for thousands of years.
Shown above is what is thought to be the oldest coin in the world. This coin is an alloy of gold and silver and was created in the ancient kingdom of Lydia around 3,000 years ago.
Why might gold become obsolete?
We have established that gold has been money for thousands of years, why would anyone think it could become obsolete? Some argue that gold is just a shiny pretty metal that has limited utility. Yes, there are some industrial applications for gold but they are pretty small compared to other metals. Is that enough to conclude obsolescence for gold? This seem unlikely given how humans expend a lot of time effort and energy to extract gold from the depths of the earth, bring it up above ground to refine it….only to lock it away in underground vault back in the depths of the earth again! The industrial utility seems to be of little relevance here, It is actually the financial utility of gold that is important. Another common argument is that gold doesn’t pay any interest. However, golds purpose is not to pay interest. Gold’s principal job is to store value and maintain purchasing power. Another argument is that gold will be obsolete if people aren’t interested in it. After all, money is a psychological phenomenon. Gold might become obsolete if alternative forms of money become widely used. However, it is important to note that alternative forms of money have come and gone throughout history, yet gold has prevailed.
The Lindy effect
The Lindy effect originated in 1964 by Albert Goldman and was later popularized by Mandelbrot and Taleb. This is the theory that the future life expectancy of non-perishable things such as technology or ideas is proportional to their current age i.e. the longer it has survived the longer it’s likely to survive. This is a kind of aging in reverse. One example would be if a book has been in print for 40 years, it is likely to remain in print for another 40 years. Similarly it could be said that gold has been a store of value for over four thousand years, and so we can reasonably expect gold to continue to be a store of value for the next four thousand years.
Gold and culture
Historically, gold has fallen in and out of favor but it has never disappeared. Money is a psychological phenomenon and so it will fluctuate in popularity. Currently, the majority of the population in western societies have little knowledge about gold and is seen as being old-fashioned. Eastern cultures such as China, India, and the Middle East still hold gold in high regard. You only need to look at the volumes of gold imports to see that gold has been steadily flowing from the West to the East for decades. It’s not just the central banks or the rich that own gold in the East. Families in small villages store their wealth in gold. If you told these villagers about paper gold and suggested they buy a gold ETF they would likely just laugh. Part of the reason for that is in those areas there is a lack of trust in the currency and the banking system. The western populations have a lot of trust in these things……for now.
Gold offers privacy
One of the advantages of physical gold is the privacy that it offers. One of the reasons that gold is out of favor at the moment is that privacy is undervalued these days. For the majority, other factors such as convenience and utility override privacy. It requires an understanding of privacy and freedom to understand gold.
Gold offers independence
Gold represents a form of independence. Unlike most financial assets, there is no counterparty risk with gold. Gold doesn’t require any actions by the owner to maintain its value. Gold is independent of electricity and doesn’t require a network to keep the show on the road. Gold just always remains gold. In fact gold from a hundred or even a thousand years ago is no different to the gold now. Gold never changes, gold can’t be destroyed at the molecular level. Fire can only melt it but it can’t destroy it. Gold won’t corrode, it won’t rust or tarnish, it endures time.
Gold offers simplicity
An admirable quality of physical gold is its sheer simplicity. It doesn’t require any complicated contracts or lawyers. You don’t require any special skills or knowledge to hold it. Gold is the simplest solution to a complex problem.
Any form of money has its advantages and disadvantages and gold is no different. No form of money is perfect and that’s why different forms of money can co-exist. The fact is that gold has stood the test of time and is therefore highly likely to continue to be money. Gold represents privacy, independence, and freedom. Sadly, these values have become eroded over time and today’s society doesn’t seem to appreciate these things as much. If the majority of individuals globally discard these values, that is when gold will become obsolete. Gold has a much deeper meaning and significance that being “just a pretty shiny metal”.