Gold and money have been used as forms of currency and stores of value for thousands of years. Both have advantages and disadvantages when used for these purposes. While gold has historically held its value well and is useful as a hedge against inflation, it also has some significant drawbacks compared to modern government-issued fiat currencies.
Lack of Portability
One major disadvantage of gold relative to paper currency or digital money is that it is much less portable and convenient to use in transactions. Gold is heavy and bulky. Large amounts of gold are difficult to transport or store securely. Paper money, on the other hand, is extremely lightweight and can be carried in a wallet or purse. Similarly, digital money can be instantly sent around the world with the click of a button.
This lack of portability makes gold an impractical means of payment for everyday purchases. Can you imagine trying to pay for groceries with gold coins or bullion? It would be very burdensome to carry enough gold on your person to cover the transactional needs of daily life. Fiat currencies like the US dollar or Euro are far more convenient for use in retail trade or e-commerce.
Difficulty in Making Change
Related to the portability issue is the fact that gold is not easily divisible into smaller increments. Making change from gold coins or bullion would be extremely difficult, if not impossible, in most everyday transactions. Paper currencies and digital money, on the other hand, are highly divisible into smaller denominations that can cover a wide range of transaction values.
For example, it would be virtually impossible to make change for a $2.75 grocery purchase using gold coins. Even the smallest gold coin denominations have significantly more value. Fiat currencies and digital payment systems allow for change in very small increments like pennies or fractions of a penny.
Limited Supply
Gold also has the disadvantage of having a relatively fixed and limited supply. Only about 190,000 metric tons of gold have been mined in human history. The supply of gold increases by just 1-2% per year through continued mining. The limited gold supply makes it difficult to rapidly expand the money supply in response to economic growth or increased demand.
In contrast, a central bank can easily print more paper currency or mint new coins to expand the money supply. Similarly, digital currencies have no upper limit on supply if the issuing authority chooses to issue more units. This flexibility in supply allows fiat currencies to more easily facilitate economic transactions and respond to changes in the economy.
Storage and Security Costs
Storing significant amounts of gold bullion or coins can be expensive compared to storing paper money or keeping digital currency in an online account. Gold must be securely vaulted and insured against theft or damage. These storage costs and risks add up over time.
Storing paper money or keeping funds in a bank account cost very little by comparison. Digital money also benefits from low storage costs considering no physical storage is actually required – it exists purely as digital records in an account.
Difficulty Using for Many Types of Payments
Gold is not widely accepted for many kinds of payments where fiat currencies or digital money are convenient. Try paying your mortgage, taxes, bills, or employees with gold. You can’t easily do it because gold must first be converted to an accepted fiat currency in most cases. Having to convert back and forth comes with extra time, effort, and transaction costs.
Checks, wire transfers, payment processors, and online payment apps make it easy to pay for many things using US dollars or other fiat currency. Digital currencies can also be seamlessly used through cryptographic payment platforms. Gold, on the other hand, remains quite cumbersome for most payments outside of in-person cash transactions.
Lack of Recourse in Cases of Theft or Fraud
Gold that is lost or stolen can be virtually impossible to recover. If your gold coins or bullion are taken through theft, fraud, or disappearance, you have very limited recourse compared to having fiat currency in a bank account or digital money in an online account.
Banks and digital payment methods typically have fraud detection systems, recovery processes, and insurance that allows you to get your money back. When gold vanishes, it is likely gone for good. This makes gold less secure as a store of value compared to assets covered by fraud protection and financial system oversight.
No Interest or Yields
Gold coins and bullion do not earn interest or generate investment returns when held over time. To grow your wealth, gold requires appreciation in its market price to generate a return on investment. This largely depends on external market conditions.
Fiat currencies and digital money can often generate some yield when kept in a bank account, money market fund, or other interest-bearing investment. This allows for some growth without relying solely on market price appreciation. Even a small yield creates some return compared to gold’s zero yield.
Large-Scale Transactions More Difficult
Using gold to make very large transactions can be more challenging than using fiat currency or digital money. It would take a lot of effort and cost to transport and verify large amounts of physical gold bullion. Digital transactions make it more feasible to transfer millions or billions of dollars worth of currency instantly.
Wiring money or digitally transferring any sum of currency between accounts takes only seconds regardless of the amount. There are no limitations on the scale like there are with physical gold transfers. This makes fiat and digital money more practical for large wholesale, international, or financial transactions.
Lack of Central Bank Support
Gold lacks the institutional backing and support of central banks and governments that fiat national currencies have. In times of financial crisis, central banks can take actions like quantitative easing to stabilize and support fiat currencies. Gold does not have this type of flexible centralized control or intervention in its value and use as money.
The ability for monetary authorities to control currency supply and implement economic stimulus measures is a key advantage of fiat money over apolitical assets like gold. This institutional support creates confidence and wider acceptance of fiat compared to gold.
No Account Withdrawals or Payments
You can’t directly pay bills or withdraw cash from a gold bar or coin. To use gold for payments, it has to be physically converted or exchanged into fiat currency first. This is a time-consuming extra step compared to using already acceptable forms of money with wide utility.
Bank account withdrawals, checks, electronic fund transfers, and online payments allow you to seamlessly use fiat currency without conversion. You can access digitally stored value instantly. Gold needs physical conversion or third-party facilitation adding cost and complexity.
Tax Treatment Can Be Less Advantageous
In some jurisdictions, the tax treatment on gold can be less advantageous compared to fiat currency accounts or digital money. Gold may be subject to capital gains taxes that don’t apply to currencies used as legal tender. This reduces the net return for gold investors.
For example, in the United States long-term capital gains on gold are taxed at collectible rates of 28% versus the 15-20% applied to currency investment gains. The higher rate on gold increases costs for investors. This makes gold a relatively less attractive asset to hold compared to fiat currencies from a tax perspective.
No Consumer Protections
There are limited consumer and fraud protections when transacting in physical gold, particularly in the case of precious metals dealers or storage services. Fiat currencies and digital money in banks have much stronger oversight and regulations around conduct, transparency, and liability.
Purchasing counterfeit gold coins or bullion leaves you with limited legal recourse compared to say, having funds stolen from a bank account. The financial system protections around institutional fiat currency create a safer environment without some of the risks of physical gold ownership.
Conclusion
Gold has some inherent disadvantages compared to fiat currencies as an exchange medium and store of value. The lack of portability, divisibility, supply flexibility, storage costs, and lack of institutional support for gold makes government-backed fiat currencies and digital money more practical and convenient for use in everyday transactions and the broader financial system.
However, gold remains an asset with different financial qualities than fiat currencies – like being insulated from inflation and monetary interventions. Rather than being a wholesale replacement for modern money, gold has advantages as a supplement to balance a portfolio and hedge against some types of risk that currencies don’t protect against.
The ideal scenario may be a combination of holding fiat currencies for everyday use and digital transactions, while also having exposure to gold for diversification and insulating a portion of wealth from factors like political and inflation risks. Used judiciously in moderation, gold still has a role in finance despite the disadvantages it has compared to more modern and convenient forms of money.