A New Characterization of Gold as Store of Wealth Across Monetary Standards and in a Global Crisis
29 Pages Posted: 28 Jul 2013 Last revised: 2 Aug 2013
Date Written: July 27, 2013
A new hypothesis is set forth regarding what it means for gold to be a store of wealth. This property is contingent on the type of monetary standard. Gold is a store of wealth in a Gold Standard when the value of a perpetuity paying one unit of gold-compensated currency (Fisher, 1912) is constant. In a fiat economy, gold fulfills its store of wealth property when the value of a gold perpetuity (consol) is constant in real terms. We provide a resolution for the so-called Gibson Paradox (Keynes, 1930). That is, gold serving as store of wealth is fully compatible with the observation that nominal interest rates were co-moving with the general level of prices during the Gold Standard era. We also provide a method for valuing gold in a fiat money economy with Treasury Inflation Protected Securities (TIPS) as an alternate store of value/safe-haven instrument. The valuation result is applicable to a large economy like the US economy with a global reserve currency. We track the price of gold in US dollars on a daily basis during the US financial and Eurozone crises from July 2007-January 2012, with a mean absolute percentage deviation of 21% and 80% adjusted R2.
Keywords: Gold, Store of Value, Hedge, Safe Haven, Perpetuities, Valuation, Gibson's Paradox
JEL Classification: G12
Suggested Citation: Suggested Citation