u-Bob

Matt,

Let's say you're on a small island (with no gold mines) and you own some gold. The other people on the island want to buy some of your gold. The only thing you want in exchange for your gold are coconuts (because you like coconuts A LOT). The other people on the island start bidding against each other. The richest guy (in terms of coconuts) can offer you 10 coconuts. You accept his offer and an exchange takes place. You give him a certain amount (in weight) of gold, he gives you the 10 coconuts.

The other people on the island would also start accepting coconuts in exchange for other goods or services even if they had coconuts of their own because they know coconuts can be exchanged for gold.

The next year there's an exceptional harvest of coconuts. so the supply of coconuts increases. If the people who want to buy some of your gold in exchange for coconuts start bidding against each other, you will be able to get more coconuts for the same amount a gold.

Now let's say someone on the island invented a machine to create coconuts out of thin air. He would be able to outbid all other islanders and buy all the gold that is for sale.

The other islanders would stop accepting coconuts in exchange for the goods and services they offer because the chance that they'll be able to use those coconuts as a means of payment themselves have decreased.

Now think of the gold as gold and think of the coconuts as the USD. (with that difference that the coconuts in itself still have value... you can eat them... can't eat USDs).

The key thing is that you should not think of your gold in terms of USD but in terms of weight. Just like you wouldn't say "I've got 15 coconuts of gold", you don't say "I've got 1500 USD of gold".

On our island, coconuts were a good medium of exchange until someone started counterfeiting them. That's essentially what happened to the USD (and other currencies), governments started creating them out of thin air.

The great thing about gold is that:
- unlike coconuts it's nonperishable.
- very little of it (of the amount that has been dug up by people and that is or has been traded) is ever destroyed.
- there's a limited increase of supply. (and to be able to increase the supply you actually need to do something, so you are essentially producing a product. You can't just enter some numbers in a computer like the bank do)
- you can divide it up in smaller pieces and later recombine them without loss of value (unlike diamonds for example)
- ...

In case of an economic collapse it's not a matter of "cashing in" (That's still thinking of gold as an investment), it's a matter of having a product that will widely be accepted in exchange for other goods and services.

If the USD or EUR have become worthless and you are selling food on the market and 50 people all offer to pay you in USD and 1 person offers to pay you in gold, who will you sell your products to?

The USD is not money, it's currency. The EURO is not money it's currency.