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Wednesday, 10 November 2010

Gold is not money

Gold can only be money if it fulfils all three functions of money:
1. Medium of exchange
2. Store of value
3. Unit of account

Gold is an item that is generally accepted as a medium of exchange.

Gold is also a store of variable real value over time.

However, the daily gold price is not a unit of account.

Gold is thus a medium of exchange and a store of variable real value, but, not a unit of account with a constant real value.

Money is also not a unit of account with a constant real value. However, via financial capital maintenance in units of constant purchasing power as authorized 21 years ago in International Financial Reporting Standards in the Framework, Par 104 (a) which states:

“Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.”

we are able to inflation-adjust constant real value non-monetary items by means of the monthly change in the annual CPI during low inflation and deflation (Constant ITEM Purchasing Power Accounting – CIPPA).

During hyperinflation we measure in units of constant purchasing power not only constant real value non-monetary items but also variable real value non-monetary items (all non-monetary items) on a daily basis in term of the US Dollar parallel rate or in terms of a government supplied daily non-monetary index as was done so successfully in Brazil during that country’s period of high and hyperinflation from 1964 to 1994. This is Constant Purchasing Power Accounting – CPPA as authorized and defined in IFRS in IAS 29.

This was not done during Zimbabwe´s hyperinflation although the daily US Dollar parallel rate as well as the Old Mutual Implied Rate (OMIR) were available to the whole country on a daily basis.

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