Gold is Not a Commodity

Gold is not a commodity and hence it should not have a price. Most of the commentators on the issue of using gold as currency still see gold as a commodity and as long gold is seen as a commodity, it will NEVER be a measure or store of value. Gold should not have a price; it should be valued based on what it can obtain. Gold would not achieve its purpose of being a medium of exchange if it continues to valued in fiat money terms.

I found an ‘interesting’ article in the electronic version of The Guardian (here) on Gold Dinar written by Nazry Bahrawi. I find the article to be short of knowledge on what Gold is and I also find the writer as someone who is very ‘anti-Malaysia’ (he is a Singaporean Malay btw).

Basically what the gold expert Nazry said was that any efforts to re-introduce gold as a medium of exchange are;

1. A burden on your wallet,
2. It is motivated by politics more than benign religious values,
3. Like paper money, gold is also vulnerable to the manipulations of valuers, our gatekeepers of wealth,
4. It lacks the egalitarian spirit embodied in socialism's virtue of the common good,
5. He asks - who is to prevent gold-rich nations from banding together as a cartel to fix prices at exorbitant amounts in the same way that the oil-producing nations of OPEC did?
6. Or multimillion corporations from exploiting poor but gold-rich nations? The Islamic gold dinar could not thwart capitalism's excesses.

I shall try to rebut each of his arguments.

1 – Nazry says using gold coins will require a wallet the size of a … I don’t know, something very big I guess. Anyway, by making this statement shows how misguided he is – the issue here is using gold as a measure of value, a store of wealth and as not a medium of exchange per se. The important thing is to have actual, physical gold (somewhere, not necessarily in your wallet) to pay for the goods and services we wish to acquire. Paper or electronic money will still work, for as long as there is real, physical gold backing each unit of that paper or electronic money.

2 – Gold currency is politically motivated rather than driven by religious values.

Firstly, everything has to be in one way or another politically related. Does he think the low price of water sold to Singapore is out of kindness by the Malaysian government? Of course not! It’s politics my friend. Even if the gold dinar wasn’t initiated by politicians, any success will cause the politicians to endorse it and jump on the bandwagon. Recycling won’t work as well if it wasn’t politically sponsored and motivated. Anyway, what is wrong with being politically motivated if the cause is a noble one?

3 – How is gold vulnerable to the manipulations of valuers? I would guess from his name that Nazry is a Muslim therefore he should know Islam forbids gold from being hoarded, which is why the zakat system is in place. For every warehouse of hoarded gold, 2.5% must be paid as zakat to the poor. So, his argument of gold can be manipulated is off the mark and so is his argument that none of the poor can have access to gold. I wonder what it takes to obtain the Singaporean Islamic Authority scholarship!

4 – This point is too deep for my limited IQ but I’m guessing he’s saying that gold trading will deprive the poor of gold if it causes the price to skyrocket. Let me repeat again, gold is NOT a commodity and hence it should not be traded for a price. Gold does not have a price.

5 – Gold rich nations fixing prices

Like I said earlier, gold cannot be traded like oil or corn or any other commodity. Even if a group of gold rich countries were to hoard gold, it will eventually circulate when it is passed on to the sellers as purchase consideration. Malaysia can hoard all the gold she wants but eventually the gold will find its way to Japan when Malaysians buy Toyotas, to France to pay for submarines, to Indonesia and Bangladesh and Nepal when the foreign workers send their money home.

6 – Multimillion dollar corporations are multimillion only when they are denominated in dollars (or euros, sterling etc). Poor but gold-rich nations are not poor when compared to the multimillion dollar corporations if the residents of the poor but gold-rich countries only accept gold as money, which the multimillion dollar corporations don’t have much of.  

Nazry argues that gold dinar is only providing one more avenue for exploitation. By whom and towards whom, I’m not sure. The poor will have access to gold when zakat is paid. Gold doesn’t have a price and should not be traded so the risk of uncontrollable price increase is zero. Gold dinar is NOT an attempt to undermine or thwart capitalism. Anything that involves the profit motive IS capitalism and that includes trading of goods and services using gild as the medium of exchange!

I feel that Nazry’s assessment is very shallow and shows his lack of understanding of economics, history of banking, fiat monetary system, usury and Islam. Having said that, the article was written in 2010, I hope Nazry has seen some light during the last two years and change his mind on the virtues of gold as currency.