Kotok on Gold

Barry Ritholtz reposts Kotok on Gold.

Kotok argues that:

…gold still maintains one important characteristic out of the three that we attribute to a functional currency.

These three (3) characteristics Kotok describes as:

1. “…the ability to exchange easily in transactions”
2. “…act as a unit of account, a method of measurement”
3. “…store of value…”

Kotok argues that only third characteristic applied to gold these days. And it is in this characteristic that the fall in the gold price can be accounted for:

In pressing Cyprus to sell, Europeans have announced to the world that there may be a large seller of gold. World traders in gold and other commodities will quickly jump on that trade. They know that if Cyprus breaks loose with the sale of its gold, countries like Greece, Portugal, and Slovenia may be next. They cannot see buying gold, thereby raising gold’s US-dollar-denominated price, in such a circumstance; but they can see selling it short, or otherwise trading it to the downside.

Kotok speculates that the stated intention by the Bank of Japan to buy gold mat eventually force the price of gold back up, but the main price driver seems to be the fear of the retail investor about what is happening in Europe.

Gold is also a consumer item in that it is used in electronic devices for wiring, and in jewelery.

Kotok's characterisations of gold all stem from its first one. The historical ability of gold to be used in exchanges between people allowed it to become money.

Although it is possible for me to exchange oranges for apples, I may not be able to exchange apples for toilet paper. However, I could exchange oranges for gold, and then exchange the gold for toilet paper. It is this general acceptance by people in making exchanges that turns gold into money.

Because gold can be readily exchanged for any commodities that I desire, I can make comparisons between different types of commodities in terms of how much gold I could exchange for the commodity. So, the ability to be exchanged for any commodity makes gold a unit of account.

Since gold is not perishable as copper or apples or oranges or toilet paper, gold can still be exchanged for commodities at some future time. Thus, the store of value is merely the anticipation of an exchange for commodities.

So, we have a contradiction due to the historical process of gold ceasing to be money in general circulation, but retaining the possibility that it could become money again sometime in the future.