by Raki

For thousands of years, gold has been used as money and often substitutes for currency and having some traits of a commodity, so investing in gold is often analogous to investing in cash.

Now be it a currency or commodity, some of the points below will clear up most common misunderstanding about gold when compared to cash.

What most people don't realize is that when it comes to comparing gold to cash is that there are two different ways of owning gold in a bank. One is "Allocated Gold and Unallocated Gold. With this definition and terminology, technically, cash deposit on bank is Unallocated Gold. I am going to compare, however, cash on deposit with Allocated Gold as when people talk about gold, they usually conjure up image of gold sitting in a vault, nothing being done to it therefore not collecting any returns.

Allocated gold is not lent out
One of the main reason we deposit money in the bank is so that it earns interest. And the greater the risk, the greater the returns should be as per Modern Finance Theory tells us. The driving engine for this interest returns is that banks lends out your deposited cash - this basically means that you lent your money to the bank and they pay up with interest. With the 'business model' you basically take risk on the banks credit worthiness and the banks good decision making on who to lend the money to. The more money the bank lends out, the more risk you have taken by depositing your money with them and banks usually lend money 10 times more than its total deposits. Now this is similar to Unallocated Gold where it is lent to a 3rd party, often multiple times than what is actually in their vaults, and this earns the lease rate.

Allocated Gold on the other hand is not lent out and does not carry any of the risk as unallocated cash or gold, it is not lent to 3rd party hence there is no return of interest, and it may even cost you to store them in banks and get charged for storage and insurance.

Though it does not earn any interest, you can always walk up to the bank that hold your Allocated Gold and demand your gold to be delivered to you pretty much like when you hold your gold into a safety deposit box.

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Cash on deposit on the other hand or "Unallocated Cash" is pretty much owned by the bank and you as a depositor ranks as an unsecured creditor for the bank, meaning that if the bank goes bankrupt, then all cash on deposit will be divided among its 'secured creditor first, unless bailed out by the government of bailed via insurance. You really cannot just walk up to a bank and ask for your money in really large amounts, you can however demand for small amounts at a time. And if all depositors asked for their money all at the same time, there would not be enough cash in deposit to pay people.

Unlike cash, gold is always accepted anywhere. And that is not gonna change anytime soon as evidenced by the trade's survival for thousands of years. There is no issue of your bill being an 'old note' and you can go to any country and you can expect your gold to be still gold when you get there.

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Gold is relatively scarce and is mined and not printed. Any country, if it comes down to just papers and inks, can print as much of their currency as they want, even that is no longer an issue as paper bills also has electronic equivalent, produce so much and the value is reduced in terms of goods and services. This is a huge difference in the obvious value of the two without being overly technical about it.

Gold is produced, money is printed

Gold is subject to price risk, but so is cash But by virtue, Gold is more secure and unlike cash, allocated gold are given exact identification numbers, records of manufacturer, purity and bar number, segregated in the vault and can be insured unlike cash wherein you have to rely on the banks accounting records for details of your account with cash that are no different from the others.

In all aspects, Gold is better than cash. No wonder it has been a form of payment for thousands of years.

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Posted: 7/3/08
Source: http://findinarticles.com