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Is gold an efficient store of value? (2003)

by on March 28, 2012

This 2003 paper analyses the properties that would make commodity money efficient through a theoretical analysis, using Gold and Tobacco as examples. The abstract states that:

Gold and Tobacco have been used as commodity money. One difference between the two is that gold yields utility, on account of its beauty, without diminishing its quantity. Tobacco yields its utility when it is consumed. If this were the only difference, which would be better money?

This paper uses a two period model of transactions, with no uncertainty, where there is only one type of money used in all transactions either gold or tobacco, i.e. all money is a commodity.

The authors find that for a durable commodity, like gold, to be efficient as money there must exist both a sale and a rental market for the commodity in order for consumption to be smoothed between periods. The authors say that gold is not an efficient store of value as there is no rental market for it. However an active rental market does exist in the lease market for gold. Please see the LBMA website for further details http://www.lbma.org.uk.

Method: Theoretical

Data: None.

Full Citation: Dubey, P., J. Geanakoplos, et al. (2003). “Is Gold an Efficient Store of Value?” Economic Theory 21(4): 767-82.

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From → Gold, Theoretical

One Comment
  1. Surely part of golds value is in its durability? Once you consume tobacco then it is gone, as is oil. The above argument supports the Warren Buffet school of thought, that gold doesn’t produce anything, so to speak (although arguably jewellery, medical instruments etc the list goes on… but gold as an investment let’s say). However, what that argument fails to recognise is what happens when all of those commodities are not utilised and are wasted. The raw material element is null and void.

    Gold has different investment characteristics than many other commodities hence its major role to diversify one’s portfolio, differences amongst assets are positive. As the foundation of a portfolio, for me, gold is the greatest store of value.

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