Is Gold a Commodity or Something Else?

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There are two things you want to know when you ask “Is Gold a Commodity”?

When is gold traded and regarded as are other commodities? Further – if you answer is gold a commodity affirmatively – should I treat gold like a commodity, or like something else…perhaps a currency?

Is gold a commodity, technically? Most people would say so.

If you asked most people if gold was a commodity, they would probably say yes. Principally, that’s because from time immemorial, it has been traded between people and used to make jewellery, and more recently all sorts of gadgets. Gold, they would say, has not been just a commodity…it has been the commodity. It is the shiny metal you want to own, and store, and keep. Yet, there is another story of gold. In this one, gold has been used as a currency. It was one of the first currencies, in fact. To-date many countries mint gold coins, albeit as collectors items.

Like most other commodities, gold is taken from the ground and refined. Where South Africa was once a world leader with some 80% of global gold production, China now holds the honour. Did you know that some 33,248.5 tonnes of gold sit in international bullion (bars of the precious metal) reserves? The rest (estimated over 100,000 tonnes) is mostly stored in the form of jewellery and bullion. The International Monetary fund is one of the largest accumulators of gold. According to various international agreements, most countries agree not to sell more than 400 tonnes annually, or use the metal to back up their currencies.

If Gold is a Commodity, where does it Trade?

Several markets trade Gold, and the two most important are the LBMA (London Bullion Market Association)  and COMEX (Commodities and Mercantile Exchange). The latter, COMEX, is part of the NYMEX (New York Mercantile Exchange).It is normally deliverable (settled) in 100 troy ounce bars that must be of at least 99.5% fineness (purity). It is quoted, normally, in USD per ozt. (troy ounce). The prices you see on the ticker tend to be set by large market makers, i.e. their last major trade. From the above, you can properly infer that gold can be traded either on spot, or on delivery. In the latter case, it is traded as a contract for future delivery. Normally, if you are large enough to be trading gold, you are trading on a margin of somewhere around 5%. 

Why would some people answer “no” to is gold a commodity?

The arguments against gold’s being a commodity range from economic to philosophical. Economically, supply tends to have little effect on gold prices. The market, that is to say, is not as efficient at clearing gold as with many other commodities, e.g. copper or aluminum. Furthermore, our stock of pure of relatively pure gold continues to increase. That is to say it doesn’t waste, deplete, or lose value. Not only that, but the industrial uses of gold are pretty simple and call for very little modification. Gold is much more of an end-product than a resource for use in production.

More interestingly, gold is most often traded at bank’s currency desks and is significantly cheaper to store than traditional commodity. In a sense, obviously the density of gold and the small size of an ounce make it cheaper to store (insurance set aside). In another sense, it’s not the physical aspects of gold that differentiate it, but the socio-economic ones, i.e. how we use it. People barter with gold to-date. Walk into any pawn shop and to see a clear example of how much gold is treated as currency.

In December 1912, J. P. Morgan testified before the bank and currency committee of the house of representatives. On the subject of control of money, he was asked “But the basis of banking is credit, is it not?” Morgan replied “Not always. This is an evidence of banking, but it is not the money itself. Money is gold, and nothing else.

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