Two of the primary economic functions of “money” are…
- To create a store of value for wealth accumulation and
- To facilitate trade through a universal medium.
To this end, both cash savings of national currencies (such as the US dollar or euro) and gold hold an important place in today’s global markets.
It isn’t truly feasible to live without the availability of cash, if only because most governments establish a set national currency. Now that electronic transfers of value are possible, legislative control is the last great advantage of cash over gold. Gold, however, holds several distinct advantages over cash savings as a means of storing wealth and maintaining wide appeal. We’ll go over 5 distinct ways that gold bullion beats cash savings.
1. Gold has Limited Supply
Limited supply is the greatest reason to hold non-cash assets, whether that be gold or silver or oil or real estate. History has invariably demonstrated two things: that governments can’t control the urge to print more money and debase a national currency; and that gold retains value through the years. I explain why this is in another post.
Gold’s value is not dictated by a central government, but rather through supply and demand. Its supply is strictly limited to what humans are able to extract from the earth. Its demand is multifaceted, since gold is valuable to a number of industries along with investing/currency considerations.
In contrast, national currencies have an effectively bottomless supply. Not only are colorful pieces of paper incredibly cheap to produce, but the values that are printed on those papers can be changed at the whim of central banks.
If you want to store the value of your wealth, cash in the bank simply can’t hold a candle to gold bullion.
2. Gold is Internationally Valuable
US dollars are the closest thing to an international cash-based currency in the world. Many central banks purchase dollars to back up their own fiat currencies…but walking around Paris or Shanghai with a pocket full of greenbacks still won’t get you very far. No point in having a lot of US dollars in the bank.
National currencies really only have value within the borders of a country, and only then because that government has decreed that the paper is valuable. Should something happen to the national economy, to the government or to the perceived worth of the cash…well then your cash savings are going to be at considerable risk.
Gold has an intrinsically different nature. With no central bank or issuing authority, gold bullion bars are a liquid form of stored wealth no matter where you go. An American Gold Eagle coin is still valuable outside of America, just as an Austrian Gold Philharmonic is valuable outside of Austria. Gold is gold is gold. (Side note – if you want to see a truly innovative way to carry gold around wherever you go, check out the Valcambi Gold CombiBar)
No matter where you go, the value of gold bullion will never disappear.
3. Gold Bullion is Protected from Credit Risk
This is an understated benefit of bullion over cash savings. To appreciate it, let’s discuss “fractional reserve banking” really quickly:
When you place cash in a bank, the bank places it into a demand deposit account, meaning that you can withdraw the funds again whenever you’d like. However, the bank doesn’t actually hold on to that money – it lends it back out. Legally, banks are only required to keep 10% of all demand deposits in their vaults, while the other 90% can be lent back out. After the bank’s borrower receives the funds, there are now two people with legal claim to the same dollars (sort of…).
This leads to two outcomes, both of them bad for cash and good for gold:
- it instantly creates more cash (the multiplier effect in economic jargon), which can lead to the value of of cash dropping even further
- it places your demand deposit account at the mercy of the bank’s lending practices. Banks can and do go out of business for poor lending decisions, and they take their deposits down with them.*
*the Federal Reserve guarantees some demand deposit accounts up to a certain balance, and the government has technically outlawed bank runs. This only decreases the chance of losing your cash savings – it does not eliminate it.
Conversely, physical gold bullion is not lent back out to anyone. It literally sits in a vault at a precious metals depository, safe and sound, not exposed to the whims of banking executives or Federal Reserve policy.
In short, gold bullion retains value far better than cash savings, is more universally recognized and is not tied to the balance sheet of a lending institution.
If you are interested in taking advantage of the benefits of investing in gold, request a free Gold IRA Investor’s Kit today. This kit is offered in partnership with Regal Assets, our #1 ranked gold investment company for 2014.