When it comes to being money, there are several attributes necessary for it to be able to hold the confidence of individuals, consumers, and people.
- General Acceptability:
- Indestructibility or Durability:
- Stability of Value:
And while many of these are more or less applicable for 99% of the assets and securities accepted as a medium of exchange, the most important one tied to confidence is assuredly that a particular asset functions as a viable store of value.
When gold reached its price peak back in 2011 versus the dollar, it completely functioned as a store of value because the dollar at that time had fallen to below 75 on the Index and languished below 80 for the next few years.
It was only when the central bank began their monetary interventions that gold began to lose value in relation to the dollar as zero percent interest rate policies caused investors to bet on the dollar and dollar based assets with the help of the Fed propping up markets and the currency.
And with this in mind it took gold three years to fall 43% in price from its peak and highs forged in 2011.
Now in 2017 many investors and speculators are looking for more options to move cash out of fiat currencies and this has led to the supersonic rise in value of cryptocurrencies like Bitcoin. However, when it comes to being a store of wealth, Bitcoin fails in many respects since its volatility can be catastrophic in much shorter periods of time.
Like losing more than 40% of its value not in years… but in just 13 days.
Gold and silver are considered money for all the attributes listed above, plus because of their long-standing relation to fiat currencies and other forms of legal tender. Bitcoin on the other hand rarely moves in relation with the currencies they are valued in, and instead are subject to the market whims of speculation and news.
In the end investors and savers need to have a full understanding of the what and why they invest in a given asset, and recognize each in their correct context as being either money, a security, a commodity, or property.
Source: The Daily Economist