GoldGrams are unique because they are the only commodity currency in circulation today. As they are a commodity currency, they have the added value of their use as a tangible commodity; this is in addition to their usefulness as money. As an example, GoldGrams could be made into jewellery if they were no longer needed as currency. This unique attribute is not available in any national currency, as all national currencies today are fiat currency, meaning that if they are not accepted as money they have no other use. GoldGrams also have other attributes not available in fiat currencies, further distinguishing GoldMoney from other payment systems such as credit cards or bank wires. These attributes, which are shown in the table below, make GoldGrams uniquely useful in global ecommerce.
|Does it have value from a tangible use?||yes||no|
|Is 24/7 clearing of payments possible?||yes||sometimes, not usually|
|Do payments settle instantly?||yes||no|
|Is it a globally accepted form of money?||yes||some, yes|
|Does it have an established history as money?||yes||some, yes|
|Does it eliminate any payment risk?||yes||no|
|Is the transaction fee small?||yes||no|
|Are payments non-repudiable?||yes||no|
|Can it be debased?||no||yes|
What is commodity currency?
If a commodity (gold, silver, grain, etc.) circulates for use as money, it is commodity currency. Commodity currencies have monetary value as well as tangible value that derives from its use as a commodity. For example, in addition to its function and value as money, a gram of gold can be used to make a piece of jewellery. In pre-monetary times, individuals bartered to trade goods and services. As economic communities grew more complex, certain commodities tacitly emerged among market participants to serve as the medium of exchange; those commodities became money. Gold, cocoa, cowry shells and tobacco are just a few examples of commodities that have been used as money. Though many commodities have been used as currency since ancient times, gold has historically proven to be the most reliable. Indeed, due to its stability, gold became the preferred medium of exchange.
How did commodity currencies become paper certificates and cheques?
As distances grew between trading communities, transporting commodity currencies for payment became expensive and risky. Ledger systems using certificates and cheques gradually replaced the transfer of physical assets (e.g., gold or silver); the commodity backing the certificate remained stored safely in a bank vault. Eventually certificates were issued by banks in greater quantity than the commodities they represented, creating what is now called fractional reserve banking. Today bank money is not backed by commodities at all. Banks, whether central or commercial, now create and circulate fiat currency. Thus, historically paper certificates and cheques have been regarded not as money, but rather as money substitutes.
What is fiat currency?
All national currencies today are fiat currency. When gold coins and paper bills used to circulate side-by-side, national currencies were redeemable. The money substitute - namely, the paper note - could on demand be redeemed for tangible assets, i.e., gold, at the stated weight promised on the face of the note. In 1971, all remaining vestiges of the promise to pay gold were abrogated. Thus, the Dollar and all other national currencies became fiat currency that cannot be redeemed for any valuable commodity. Fiat currency has value only so long as others are willing to accept it in an exchange.
Why is commodity currency better money than fiat currency?
While commodity currencies have intrinsic value because of their tangible function as a commodity, fiat currencies have no intrinsic value whatsoever. Therefore all fiat currencies should be viewed for what they are - a liability of a given financial institution. Conversely, a commodity that circulates as currency remains a solid, tangible asset.
Moreover, commodity currencies are an objective measure of value because they are based on globally accepted standards of measurement; they are completely reliable, unchanging units of account. For example, a gram is a precise weight recognised and understood world-wide. Assuming the quality of the asset is constant (i.e., each unit of account is a gram of fine gold), each and every unit of the commodity currency are unconditionally interchangeable because they are identical. Therefore commodity currencies are a constant, easily understood, and readily acceptable form of money.
Conversely, fiat currencies are not an, and cannot be, an objective measure of value because they differ in value depending on the quality of the obligations (i.e., loans and other assets) that back the currency. Take the following example: Dollars in Bank A which holds a strong loan portfolio are better than Dollars in Bank B which carries a weak loan portfolio (i.e., the bank carries many financially distressed customers who do not have the capacity to pay back money they have borrowed). These differences in the quality of bank portfolios can be ranked and managed to some extent, but they still add extra complexity, cost and uncertainties that do not exist with commodity currencies. Generally speaking, fiat currencies exist only because they have been put into circulation by government edict, not because they are better or hold more value than commodity currency.
Why does a bank's loan portfolio affect the quality of the currency it creates?
Fiat currencies are based on an obligation to repay a debt. Banks create dollar currency by extending credit to their customers. For example, assume a bank grants someone a $500 loan. If the loan is not repaid, the $500 dispensed by the customer into the economy are not backed by anything of value. In other words, those $500 are potentially worthless, and their value ultimately depends solely upon the bank's own creditworthiness. If a bank extends too many non-performing loans, the quality of its balance sheet can be seriously impaired. This can create systemic effects that could jeopardise the financial stability of other banks. The currency crises in Mexico and Asia in the 1990's and the Savings & Loans crisis in the United States in the late 1980's provide clear examples of the negative impact on an economic community when the quality of fiat currency becomes eroded.
What is payment risk? What kinds of payment risk are associated with commodity and fiat currencies?
Payment risk is the risk that a transaction between two parties fails, leaving the payee without the promised funds. There are three types of payment risk:
|Type of Risk||GoldGrams||Fiat Currencies|
|Credit Risk||no risk||yes|
|Settlement Risk||no risk||yes|
Credit risk exists because a bank customer may not make his loan repayments in full and on time over the course of his loan obligation. Banks are generally careful about credit risk, but the risk cannot be eliminated. Inevitably some loans will not be repaid, and during economic downturns the number of unpaid loans usually increases. These asset quality problems -- and the uncertainty and doubt they create -- are central to the problems that periodically plague fiat currencies. The crises in Mexico and Asia in the 1990's and the Savings & Loans crisis in the United States in the late 1980's would again be examples.
Commodity currencies have no credit risk because they are solid assets. The value of a commodity currency is not based on an extension of credit, as are all fiat currencies. Thus, when an institution or individual accepts fiat currency, that institution or individual is accepting a promise to pay. A risk is assumed until the fiat currency is exchanged for a tangible good or service; at this point the risk is passed on to the individual or institution receiving the fiat currency.
Settlement risk exists because payments in certain transaction systems are not always made. Although non-payment can happen for many reasons, it primarily occurs when the paying bank does not have sufficient funds to pay as it had promised. Therefore, most settlement risk is caused by a liquidity crisis within the banking system brought on by credit repayment problems. A recent example would be the collapse of the Russian bond market in 1998.
Commodity currencies do not have settlement risk because the payer is simply transferring ownership of the asset being used as currency.
Both commodity and fiat currencies are subject to operational risk arising from within the infrastructure operating the payment system. GoldMoney mitigates this risk by using a redundant and highly secure IT infrastructure.
How is the gold price determined?
The price of gold is the rate of exchange between gold and national currencies. This rate of exchange is determined in markets around the world, the largest of which are in London, Zurich, New York and Tokyo. Buyers and sellers of gold meet at these markets to announce the rate at which they wish to purchase or sell their gold relative to the national currency used in that particular market; through this process of discovery, a market price (i.e., a gold-to-fiat currency exchange rate) is determined.
Why does the gold price fluctuate?
Fluctuations in gold's rate of exchange to a national currency are due to the changing dynamics of supply and demand in the market at a given time. The four forces at work that cause these fluctuations are the supply and demand of gold plus the supply and demand of the currency for which it is being exchanged. When there is a greater supply of gold available than demand, the gold/currency rate of exchange moves lower. In short, it takes a greater weight of gold to purchase the same amount of currency. However, when there is a greater demand for gold than supply, the gold/currency rate of exchange moves higher. It now takes more currency to buy the same weight of gold. Alternating preferences for currency types can cause the gold/currency rate of exchange to fluctuate in the short-term.
If the GoldGram rate of exchange is falling, why should I hold GoldGrams instead of currency?
Currency values fluctuate. GoldGrams are no different in this regard. For example, although GoldGrams declined slightly against the Japanese Yen in 1999, GoldGrams rose against the Euro. Because GoldGrams lost value relative to the Yen, holding GoldGrams may not seem attractive to companies that do most of their transactions in Yen. However, a business that deals primarily in Euros would find that their GoldGrams appreciated. Moreover, if an international company has both GoldGram revenue and expenses, the company benefits in at least three ways: By using a common currency for its international transactions, a company can substantially eliminate costs arising from fluctuating exchange rates. Secondly, a common currency enables the company to price contracts more efficiently with suppliers in various countries; this helps protect profit margins on products with global components. Finally, the company minimises costs that otherwise arise from global business, such as costs involved in converting one fiat currency into another.
There are further advantages to using GoldMoney, as well. Peace of mind, ease of use, control of costs, and the aforementioned qualities mentioned above equal unrivalled benefit to the individual or institution.
What distinguishes GoldGrams from other currencies?
GoldGrams provide a unique advantage over all national currencies because their purchasing power is preserved over the long-term. In the following charts, note the difference in the price of crude oil when calculated in terms of Dollars vs. GoldGrams.
In the Dollar chart the price of crude oil fluctuates AND gets increasingly more expensive, as shown by the rising red line. In the GoldGram chart the price of crude oil fluctuates but does not get more costly. In this case the red line remains steady. While the purchasing power of the Dollar shrinks, GoldGrams preserve their purchasing power. Gold serves it role as money exceptionally well; it provides a consistent long-term measure of value. This conclusion is not new, as is evidenced by the following quote:
We assume that the currency which is in all our hands is fixed, and that the price of bullion moves; whereas in truth, it is the currency of each nation that moves [i.e., loses purchasing power], and it is bullion which is the more fixed [i.e., maintains purchasing power]. - Henry Thornton, An Enquiry Into the Nature and Effects of the Paper Credit of Great Britain, 1802.
Why does gold maintain its purchasing power over the long-term?
Gold is fundamentally different from all other commodities in one very important respect. Most commodities are produced for consumption. Gold is the exception because it is produced for accumulation. Even other metals such as copper are consumed; they are widely dispersed in small amounts used in countless applications. Conversely, very little gold is consumed, destroyed or lost. In fact, more than 95% of all the gold mined throughout history remains viable to this day. Most of this gold is readily available in liquid form, namely, bars, coins and high-carat jewellery; each of these forms can be easily and quickly exchanged into national currency. Cumulatively, this gold comprises the aboveground stock. The quality of gold already above ground is of the same quality of that which is newly mined, which increases the aboveground stock by only 1.5% to 2% per annum. This rate of increase in the aboveground gold stock approximates the world's population growth (i.e., demand) and the rate of new wealth creation (i.e., the increase in the supply of tangible goods and services). Because these factors of supply and demand are nearly identical over the long-term, gold's purchasing power is maintained over time. National currencies lose purchasing power over the long-term because governments and their central banks increase the quantity in circulation at rates well above basic factors of supply and demand.