Deutsche Bank explains why we hoard gold

Deutsche Bank: GOLD IS MONEY
Matthew Boesler|Sep. 18, 2012, 5:53 PM
Business Insider (Video & images added by me)

Is gold money?

It's become a tireless debate: goldbugs seem to cling to the shiny yellow metal with a religious fervor not usually displayed by anyone toward other asset classes, and it's been known to frustrate some who don't share their views.

Gold often gets lumped in to investment forecasts with other "commodities" – real, consumable things like oil or food.

But Deutsche Bank analysts Daniel Brebner and Xiao Fu say gold is seriously misunderstood, and in a new report – wherein they update their gold target to $2000/oz sometime in the first half of 2013 – they explain that "gold is not really a commodity at all."

(From Fallacies)

The undisputable evidence for the case that gold is money, according to the Deutsche Bank analysts:

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.

(From Euro Gold)

That's their take. But there's more – the analysts differentiate between "good money" (gold) and "bad money" (fiat paper currency):

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.

What's interesting is that all of the arguments against gold propogated by the anti-goldbugs – that it's not really a consumption good, that it serves no industrial purpose, etc. – are all the exact reasons why Brebner and Xiao call gold "good money."

The analysts elaborate on this point in the report:

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...

Other characteristics are important of course in fulfilling the requirements for ‘good’ money: indestructibility, divisibility, transportability and universal acceptability.

Hat tip:

Deutsche Bank boys been reading FOFOA? read.bi/Ua1J4y
— RonaldJamesPadavona (@RJPadavona) September 18, 2012

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From Kicking the Hornets' Nest:

In Gresham's law there is good money and bad money. There are two moneys, not three. Good and bad, not good, so-so, and bad. The bad money drives the good money out of circulation. In other words, the bad money circulates (and becomes the medium of exchange) and the good money lies very still (becoming the store of value). Look at this latest Eurosystem quarterly report again:


And from The Return to Honest Money:

As I mentioned above, in the same way that a medium of exchange is to one extent or another also a store of value, stores of value are also to one extent or another media of exchange. The question is one of degree, and this is how, through market forces, we end up with "two monies." Being the focal store of value does not make something the best medium of exchange, and vice versa.

This might be a good time to take another look at the ECB quarterly statement. There it is, two monies. One on the left, one on the right. Separate roles.

[…]

This is how you have a true competing currency. Not two currencies competing for the medium of exchange crown. But a separate medium of savings competing against the medium of exchange for "pole position" on the 'Time=t' axis:


This is Freegold, and it is unfolding today. It requires no activism or political/legal changes at this point. It is, how do you say, baked into the cake already? And once again, these posts briefly explain how we aren't quite there yet, how Freegold is different from what he have today, even though it is "already in the pipeline."

Sincerely,
FOFOA