GOLD: Currency vs. Investment
There's been quite a bit of discussion lately about gold being deemed currency. In fact, Utah just passed a law where gold coins are considered legal tender [May, 2011] . . . but realistically no one would be able to - or even want to - use them as currency unless they wanted to lose a lot of money. Would you take your $50 gold piece (value $1,500) and use it to buy $50 worth of groceries? I think not. While states have the Constitutional ability to recognize gold and silver 'coins' - it cannot change the value of the coin to reflect the current 'gold' - or 'silver' - value.
That being said, gold really isn't currency because it doesn't meet the definition of modern currency - nor can it. Currency can be defined as something that is used as a medium of exchange meeting certain characteristics. Some of those characteristics being it must be easily transported, durable, and difficult to counterfeit - to name a few. Gold does not meet any of these.
So why do some say gold is a bad investment. To understand the place gold holds in an investment portfolio, one needs to adjust the way one thinks. To understand this you need to know that gold investments are not good nor are they bad. Gold is money - not an investment. How does one define an investment? An investment is the commitment of capital or money to purchase assets or financial instruments with the thought of gaining profitable returns in the form os income, interest, or appreciating of the investment itself. By investing, the investor is putting their capital at risk. They may get back more than they invested, less than the original investment or in some cases nothing - they may lose it all.
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Knowing this you can understand how physical gold or physical currencies that are stored in a locked vault are not 'invested' - they are simply stored with neither one earning any type of dividend or interest . . . and there is no risk. One might say the primary difference between gold and currency kept locked away is that the purchasing power of gold continues to increase while the purchasing power of paper currency decreases. Remember, gold bullion is not an investment because it does not depend on someone else's promise of performance.
However, one should not confuse gold bullion with the other forms of gold ownership....
- paper gold certificates
- unallocated bullion accounts
- shares in gold mining companies
- future contracts
These all have risk based on someone else's promise to perform and as such are all investments.
Bottom line, if you're thinking of putting some money into gold you need to remember . . . we invest in financial assets, we keep our currency in the bank, and we store our physical gold in the vault.
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