Originally posted Tuesday, October 02, 2012
“(Gold) is in fact a medium of exchange and one that is officially recognised….” Deutsche Bank, September 18, 2012
Something interesting is happening when, out of the blue Danube, as it were, Deutsche Bank calls gold essentially money (rather than a commodity).
Deutsche Bank, with 100,000 staff in 70 countries, including offices in London, Madrid, Frankfurt, New York, Paris, Moscow, Amsterdam, Istanbul, Dublin, George Town, Cayman Islands, Toronto, Kuala Lumpur, São Paulo, Singapore, Hong Kong, Tokyo, Sydney, Dubai, Riyadh, Manila, Mumbai, Bangkok and Belgrade is a global financial titan and as mainstream and, indeed, full of probity as it gets. Therefore, its September 18, 2012 Global Markets Research Report entitled “Gold, Adjusting for Zero,” turned heads around the world.
The report then goes on to assert that gold is misunderstood and doesn’t really belong in the basket of “commodities” used by so many economists. Gold is money, according to the Deutsche Bank. Says it: “We would go further however, and argue that gold could be characterised as ‘good’ money as opposed to ‘bad’ money which would be represented by many of today’s fiat currencies.” It refers to Gresham’s Law and suggests “the undervalued money (good) will leave the country or disappear from circulation into hoards, while the overvalued money (bad) will flood into circulation.” There follows a discussion that would make Ron Paul blush, though it doesn’t mention the congressman who, with the businessman scholar Lewis Lehrman, has been pushing this issue all these years. Deutsche Bank notes that discussion of the gold standard has become a common theme, a development that “says much about the change in attitudes by investors, many who would have ridiculed the mere mention of such a thing as little as five years ago.”
The observations of the paper’s authors, Daniel Brebner and Xiao Fu, from its London office, are striking and astute:
Gold as Money
Gold is widely misunderstood, in our view. Many investors don’t understand how it is valued and why it behaves the way it does. Many investors are uncomfortable that gold is not ‘consumed’ like other commodities – it is not eaten, or burned or forged as food, energy or industrial metals would be.
Gold has no use, according to many. But then gold is not really a commodity at all. While it is included in the commodities basket it is in fact a medium of exchange and one that is officially recognised (if not publically used as such). We see gold as an officially recognised form of money for one primary reason: it is widely held by most of the world’s larger central banks as a component of reserves. We would go further however, and argue that gold could be characterised as ‘good’ money as opposed to ‘bad’ money which would be represented by many of today’s fiat currencies. In describing gold as such we refer to Gresham’s Law – when a government overvalues one type of money and undervalues another, the undervalued money (good) will leave the country or disappear from circulation into hoards, while the overvalued money (bad) will flood into circulation.
Support for this assertion comes from our interpretation of US government action at the end of dollar convertibility in 1971 (end of Bretton Woods system). The US ended convertibility because it did not want to send its gold to France or Britain who were demanding gold (or about to) rather than dollars; this in response to the decline in perceived value of the dollar due to profligate government spending during the 60s. The US government valued its ‘good’ gold money more than its ‘bad’ paper money and therefore set about hoarding it – officially. Thereafter the USD, the bad money, became the world?’s reserve currency, (with immense benefits for US government funding, in our view).
Our ‘good’ money assertion holds from this point, but for a short window during the late 1990s when several western governments (Britain, Canada, Switzerland, etc.) decided to convert their gold to other (presumably more valuable?) fiat currencies – most likely the US dollar. We would suggest that the US government did not object.
Characteristics of ‘good’ money
In our view the ideal medium of exchange must balance the paradox of representing value while having little intrinsic value itself. There are very few media which can do this. Fiat currencies physically have no use other than that which is prescribed to them by government and accepted by the public. That fiat currencies cost little to produce is of a secondary concern and we believe, quite irrelevant to the primary purpose.
Gold is neither production good nor consumption good. Jewellery we see as a form of storage or hoarding (the people of Portugal have all but exhausted their personal gold stores ?– hoarded in the form of jewellery – having converted them to survive the crisis). If gold did have a meaningful commercial use we believe that it would make the metal less attractive as a medium of exchange as the value of the metal in whatever market it was used in could periodically interfere with its medium-of-exchange role.
That gold is fairly costly/difficult to obtain is of secondary relevance to the value that it is used to represent in our view. The fact that this characteristic has throughout history continuously frustrated governments reliant on a gold-standard and therefore unable to expand their spending at will is secondary. Nevertheless we do believe that scarcity could be an important factor in ensuring the longevity of a currency. Scarcity may create some stability in the value that it represents and in turn impact the confidence with which the public regard it.
Other characteristics are important of course in fulfilling the requirements for ‘good’ money: indestructibility, divisibility, transportability and universal acceptability.
This paper goes on at considerable additional length, always thoughtfully so. The qualities of gold they enumerate, of course, closely parallels the listings of why gold is the optimal money meticulously enumerated by former Reagan Gold Commissioner Lewis E. Lehrman in his highly praised work The True Gold Standard, first published on August 15, 2011 and now reissued in a revised and expanded second edition.
To have thought leaders such as Deutsche Bank come to, and present, comparable conclusions is a sign that the gold standard is, indeed, emerging as a mainstream policy matter. It is appearing with growing frequency in the elite financial and political press. It is even likely that extensive coverage by the mass media will prove not far behind.
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