Is Gold A Commodity?

Strictly speaking, gold (XAU) is a commodity but also a currency in many ways. However, to clearly understand how gold can be considered a currency, it’s essential to first define the terms of “commodity” and “currency”.

Key Points

• Gold is a commodity due to its fungibility and its consistent nature, meeting standards that make it interchangeable regardless of its source.
• Gold does not currently serve as a formal currency since it isn’t issued by governments in circulating coins but was historically used as money up to the early 20th century.
• Despite not being a circulated currency, gold is still held by financial institutions and central banks as a wealth reserve and by investors as a hedge and safe-haven asset.

What is a Commodity?

The term commodity basically refers to an item that can be sold or bought and interchanged with other commodities. They are commonly used in the production of other commodities or goods and services ^[1]. 

Although the value of a particular commodity can differ slightly, there are some standards to meet. These standards ensure that the commodities are basically the same in nature, no matter who mined it or where it was mined. This means that to traders, gold is gold regardless of the producer. 

What is a Currency? 

Currencies are widely accepted forms of money, including paper notes and coins issued by governments and circulated within economies. Currencies are the basis for trades, used as a generally accepted medium of exchange.^[2]

Is Gold Considered a Currency or Commodity?

According to the criteria above, it’s clear that gold meets all the requirements needed and we can deduce that gold is a commodity.

Just like other precious metals such as silver, gold is a natural material. This basically means that gold is naturally fungible (identical and interchangeable). It is used in a wide range of applications, including the production of electronics and jewelry. Moreover, it is also widely traded in the global commodities market.^[3]

Is Gold Still Considered a Currency?

Although gold does not meet all the necessary criteria to be considered a currency, it was widely used as a currency in many economies up to the early 20th century. Unlike paper money and fiat money, governments no longer issue gold in circulating coins. However, it is still used as a basis for trade and as a medium of exchange.

Before 1971 when the gold standard was still in effect, the US dollar was fixed to the gold price. In theory, gold and the USD were exchangeable. Therefore, it could then be considered a currency.^[4]

Financial institutions, governments, and central banks continue to hold gold reserves as a store for wealth. On the other hand, individual investors held gold as a hedge investment, store of wealth and long-term safe haven. Ultimately, these gold reserves can be used as a basis for trading and exchanged at commodity prices.

The fact that gold coins continue to be produced today and credited at face value is another argument for considering gold as a currency. For instance, the Gold Sovereign and Gold Britannia have face values of £1 and £100 respectively. Although gold coins are not generally accepted in banks and shops, they are still considered legal tender with numerous tax advantages.^[5,6]

Trading Gold CFDs

You can trade gold without having to own the asset physically, through gold CFDs. Like trading currency pairs, traders buy or sell gold against the USD, and gold CFD is represented by XAU/USD where USD is the dollar component and the XAU represents gold. When the gold price is projected to fall, traders can sell this pair and buy it when prices are projected to rise.

You can also trade stocks CFDs with Vantage. Open a live trading account in less than 5 minutes with Vantage and begin trading with $0 commission on all US stock CFDs.

References