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In my two "Gold Is Not Money" posts (HERE
and HERE) I explained why it is not correct to think of gold
as money these days, and in a subsequent post I explained why it was not correct to
view gold as an economic constant (there is no such thing as an
"economic constant"). It is clearly also not correct to think of
gold as "just a commodity", because if it were just a commodity
then its price would have collapsed relative to the prices of other commodities
due to the massive size of its aboveground supply relative to its annual
usage in commercial/industrial applications. Instead, the price of gold is
near an all-time high relative to the CRB Index. So, if gold isn't money and
it isn't an economic constant and it isn't just a commodity, then what is it?
Is gold a speculation? That's a matter of opinion. Some of the
commentators who claim that gold is money tell us that gold is not a
speculation, but they are only expressing a personal view. For example, if I
buy gold with the aim of selling it in a few months at a higher price, then
gold is a speculation to me.
Is gold insurance? It can be, but many of the people who own gold do not
hold it for insurance purposes. Gold is certainly not inherently a form of
financial/monetary insurance, but it can be held for such a purpose.
Furthermore, of the people who believe that gold can be used as
financial/monetary insurance, one group thinks that it should be used for
this purpose all the time while another group thinks that it should only be
used for this purpose when the risk of monetary collapse is high. For
example, I own gold and recognise its ability to be a form of insurance
against financial catastrophe, but none of my gold is currently held for
insurance purposes. In my opinion there isn't a good reason to hold gold for
insurance purposes right now, because there will always be warning signs well
in advance of a monetary collapse and those signs are currently not present
(at least with regard to the US$). That's my opinion. Other people think
differently.
Is gold a good store of purchasing power? It depends on the starting point
and the time frame. Gold has lost a lot of purchasing power (PP) since its
September-2011 peak and lost more than 90% of its PP from its January-1980 peak
to its April-2001 trough. Furthermore, despite the huge gold rally of
2001-2011, someone who bought gold at its January-1980 peak (almost 36 years
ago) and held to the present day is still down by more than 50% in PP terms.
However, someone who accumulated a long-term gold position during 1998-2002
and held to the present day would still have a substantial gain in PP terms,
despite the large decline of the past four years. In this respect gold is
similar to investments in companies or real estate. Regardless of the quality
of an investment, if the purchase price is high enough it will probably
generate a large PP loss.
As an aside, the importance of timing will be obscured by extremely
long-term studies. Of particular relevance, studies that assess gold's
performance over centuries will suggest PP stability and will mask the fact
that if you bought near one of the speculative peaks you would have sustained
a permanent loss.
Is gold a financial asset? The answer is yes. Moreover, it is considered
to be one of the world's most liquid financial assets, which is why some of
the world's most important clearing houses accept gold - along with other
liquid financial assets such as T-Bills - as collateral. However, physical
gold is not someone's liability, which means that gold can't suddenly become
worthless as the result of a default. In this respect gold is a safer
financial asset than a T-Bill or any other security.
In summary, gold is primarily a liquid financial asset that can be held
for speculative, insurance, store-of-purchasing-power or collateral purposes.
http://tsi-blog.com/blog/blog-default/
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