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 “commodity” and “currency”.

Key Points

• Gold is a commodity due to its fungibility and consistency, 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 it was historically used as money up to the early 20th century.
• Despite not being a circulating currency, gold is still held by financial institutions and central banks as a reserve asset and by investors as a hedge and safe-haven asset.

What is a Commodity?

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

Although the value of a particular commodity may vary slightly, there are still standards to meet. These standards ensure that the commodities are essentially the same in nature, regardless of who mined them or where they were 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 trade and serve 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, and we can deduce that it is a commodity.

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 criteria for currency, it was widely used as a currency in many economies until 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 price of gold. 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 of wealth. On the other hand, individual investors hold gold as a hedge, a store of wealth, and a long-term safe haven. Ultimately, these gold reserves can serve as a basis for trading and be exchanged at commodity prices.

The fact that gold coins are still produced today and credited at face value is another argument for considering gold 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 by banks and shops, they are still considered legal tender and offer numerous tax advantages.^[5,6]

Trading Gold CFDs

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

You can also trade stocks and 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