GOLD – What It Is (MONEY) & What It Isn’t

What Gold Is

Of all the elements in the universe, GOLD (atomic number 79, chemical symbol “Au”) is uniquely positioned to serve as MONEY and has done so since ancient times. Admittedly, there are other contenders for the honor, including silver most notably, but the experience of centuries has confirmed the yellow metal’s status as money, without equal in the physical world. Why is this so, and what does this have to do with our modern digital economy, in which gold plays a minor monetary role compared to paper and digital forms of “fiat” money, such as US dollars, Euros and Chinese Yuan?

The 118 elements in the periodic table represent the options available to humankind, at the atomic level, for materials that can potentially be useful as money. Gold is the element we humans have always tended to choose. Why? In 2013, Justin Rowlatt (BBS World Service) posted an interesting interview with Andrea Sella, a professor of chemistry at University College London. During the conversation, which took place among an exhibition of pre-Columbian gold artifacts at the British Museum, Prof. Sella guided Rowlatt through a tour of the elements of the Periodic Table of 118 elements, explaining why most of the matter in the universe is completely unsuitable for use as money.

Most of the elements can be easily dismissed for various oblivious reasons. Elements that exist as gases or liquids in normal conditions of temperature and pressure would be impractical as a unit of exchange, as are other elements that are either poisonous, radioactive or chemically reactive (think “exploding money”). Also, some elements, such as the so-called “rare earths” are simply too scarce to be practical.

After excluding the majority of elements for various reasons, we are left to consider a large group of about 49 elements known as "transition" and "post-transition" metals, which includes many familiar names: iron, aluminum, copper, lead, silver and others. However, upon closer examination, most of these have serious drawbacks. Several are extremely hard or have very high melting points (titanium and zirconium, for example). The technology required to extract these metals from ores was not available to ancient man, and forming them into coins would still be impractical in modern times, given the alternatives available. Other metals are simply too flimsy for coinage (aluminum) or so corrosive that the coins would be a self-debasing currency (iron, copper, lead).

By process of elimination, this leaves eight elements for the final cut: platinum, palladium, rhodium, iridium, osmium and ruthenium, along with the old familiars, gold and silver. These are known as the “noble” metals, because they stand apart, barely reacting with the other elements. They are also all quite rare, another important criterion for a currency. In fact, most of these are actually too rare to serve as practical money, unless coins were minted in impossibly small sizes.

This leaves two finalists in the search for physical money: gold & silver. They are rare, but not too rare, malleable, inert, durable and uniform. However, silver has a bad habit of tarnishing. In the final analysis, although silver has served as money through the ages, something about the golden hue and incorruptibility of gold has caused this particular metal to excel as money since time immemorial.

How Much Gold Is There?

Humans have searched for gold continuously since ancient times, yet even with modern technology gold is still incredibly difficult to find. Only about 160,000 tons of gold have been taken out of the Earth since man began mining it. That may sound like a lot, but 160,000 tons of gold is less than you might think. Formed into a single gold cube it wouldn’t quite cover a tennis court. Mining increases the above ground supply by about 1.6% per annum (about the same as global population growth), and this newly mined supply means the world's cube of gold - currently 20.2 meters across - is growing by just 11 cm per year.

What Gold Is Not

In a subsequent post, I will address the issue of what gold is not. Although gold is often discussed and viewed as an investment and as a commodity, in many important ways it is neither. Gold also differs in significant ways from other forms of money that we accept and use every day, such as paper money and digital (checkbook) money. Gold’s role as money is also often obscured by the fact that has appeared and seemingly disappeared from circulation on a regular basis through the ages. This is the consequence of a principal known as “Gresham’s Law”, which states that bad money drives good money out of circulation, and I will also take up this topic in future posts.

I would welcome a discussion in the comments with anyone who has an interest in the subject.

This post is here to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make or don’t make involves risk.

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