Is Gold a Commodity or a Currency?
It’s not uncommon to hear this question: “Is gold a commodity or a currency?” The answer to this question is a little more difficult than you might think. In order to get to the bottom of this, we have to first look at the various asset classes that gold could fall under.
What are the 5 main asset classes?
Asset classes are defined as different groupings of investments that are similar or have similar regulations. Here are the five main asset classes that you should know about.
A share, or an equity, is a unit of ownership that represents an equal proportion of a company’s capital. Investors can trade shares on a stock exchange. If your entire portfolio is in shares, your investments are fully dependent on the health of the stock market and the sector(s) of the stock market that you’re invested in.
A bond is a fixed-income investment that represents a loan made by an investor to a borrower (typically a corporation or the government. Bonds are tradable assets and generally have fixed interest rates. They are, on average, less volatile than shares. However, if the bond defaults, you’re unlikely to see the full return you were expecting.
Property (real estate)
Real estate as an asset can be considered any form of property ownership that you have. This includes the property or properties you live in. Like stocks, real estate is tied to a positive economy. The most recent example that comes to mind is 2008 when stocks and real estate collapsed together.
Commodities are raw materials that you can legally buy, sell, and trade. This includes agricultural products, lumber, and metals. Each commodity comes with its own dependency. For example, agricultural commodities like corn, coffee, and livestock can be dependent on weather events. On the other hand, extracted commodities like lumber can be severely affected by low production (as seen in the current spike in lumber prices due to the Covid-19 crisis).
You’re probably already familiar with cash as an asset class. Simply put, cash is the most common asset that private investors have. It includes what’s in your bank accounts, your wallet, and your money market funds. The value of cash is measured by the purchasing power of the dollar, which has been on a steady decline for 50 years due to massive money printing and inflation.
Is gold a commodity or a currency?
Gold is a commodity, but there is a grey area with gold. It’s not a simple answer.
Gold is a raw material that is mined, graded, and sold. However, it’s also minted. While you can’t buy a gallon of gasoline at your local gas station with a gold coin (meaning it’s not a directly recognized form of currency), you can exchange that gold coin for currency.
Historically, gold has been used as currency by several countries. It has also been used as a standard for trade because it has a set value. However, after the gold standard was dropped worldwide, gold went from currency to commodity, even though it’s still being minted by governments.
Is investing in gold a good idea?
Ultimately, investing in gold is one of the best ways you can work toward protecting your financial future. Even if gold isn’t technically a currency, the value of gold and its close ties to currency is recognized around the world as they’ve been for thousands of years.
Additionally, gold and other precious metals are commodities that aren’t affected by the stock market, weather, or the value of the dollar. This means that when all other asset classes are in turmoil, gold tends to rise because people start seeing the stability in gold investment.
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