Is Gold Ready To Make A Comeback?


Will Gold Finally Replace The Fiat Monetary System?

They say gold is the only true money.  Better said, unlike fiat paper money, the only true form of currency value that the politicians cannot screw around with.   Is something old, such as gold, new again?  The well known (and we would say crackpot) economist John Maynard Keynes called gold a barbarous relic.  Is that why gold has been sought after as a storage of wealth for centuries?

Can it be that something as old and time tested as gold has finally made a comeback?  Well, the truth of the matter is that it never went away.  Gold has been used for centuries as a medium for exchange, or in other words, as money.  Aside from that, gold has also been used as a way to hold or store wealth as well.  In fact, gold has historically been just one of the many commodities or assets people have held onto as a hedge against paper money inflation.  Why are many people thinking about gold once again and why has the price been rising over the past few years?  Why has gold been called - The Peoples Money?

To answer some of these questions, we think it to be important to understand what is going on right now in the world (economically speaking) and what has happened in the past as well.  So, to work our way back in history, it is important to note that while some governments have played around with fiat paper money for some time (the Chinese first experimented with fiat paper money about 1,400 years ago), gold has always been the money standard, so to speak.  Where as man started off with a barter system as way to exchange goods and services for value, eventually this lead to the use of other things as a form of money - shells, beads, cattle, and so on.  Eventually, it was decided that the most portable, valuable and easiest commodity to be used as a means of money, was precious metal (gold, silver and palladium or platinum).  The term precious does not refer to any aesthetic beauty (although refined and polished objects made out of these metals can be quite attractive), but rather the term really refers to the fact that these metals are in short supply relative to all other kinds of metals (copper, iron ore, etc.) and therefore more valuable.  As a result, they represented an almost perfect choice as a store of value, or money for the society.

So, paper money was not the original choice of man for money - it was gold and for good reason.  In fact, fiat paper money, or money not backed by any physical commodity at all (which is what fiat really means) did not start off that way.  Paper money actually has its origins in paper gold deposit receipts issued by banks or special gold deposit warehouses.  Which is to say, some people found it to be a bit inconvenient to haul around quantities of gold (gold is heavy) in order to conduct business or make purchases.  Not only that, of course having large stores of gold in your home could offer up the risk that it might be stolen.  So, the idea of a depository or warehouse was created.  In fact, this really was the precursor to the modern bank we know of today. Citizens, would then deposit their gold in this gold bank, for lack of a better term, and simply exchange receipts.  These receipts sort of acted like checks, in that someone could sign over the receipt to someone else.  That other person could physically go down to the bank and withdraw the gold if they wanted, or also simply turn it over to someone else yet again.  This is really where the current modern idea of paper as an exchange or money medium came about.  The paper itself represented a deposit of gold held on deposit somewhere, but there was some physically commodity (gold) as a backing.

Exploring the original idea of gold being used as money, and more precisely minted gold coins, it was true that were various different smelters or private minting firms that actually created the one ounce, half ounce or whatever other domination of coins or bullion bars that existed.  However, one ounce of gold was indeed one ounce of gold.  It really did not matter who took the raw gold metal and fashioned it into a bar or coin, providing it was indeed one ounce of pure gold. In this regard, one ounce of pure gold minted by one private company was as good as one ounce of pure gold from any other.

Politicians of course got the bright idea that THEY alone should control, regulate and issue the coinage process, thus standardizing the gold coin used through out the country or territory.  The Romans were of course the first to do this on a grand organized scale, and they were also really the first to play games as well.  Meaning, Roman Emperors, in order to increase the assets or wealth of the state coffers, got the idea of slightly reducing the gold content or amount of gold in each one-ounce coin.  At first, they shaved a bit off each coin, thus the result being a one ounce coin that weighted slightly less than one ounce, but not enough for the public to take notice.  Of course, if you shave a fraction of an ounce off of millions of these coins, it adds up.  Over time, the Roman Emperors became bolder and bolder, and started to mix lead or other base metals into the coins to reduce the gold content.  The result of this was that the coin still could weigh one ounce, but it was NOT one ounce of pure gold.  So, over time, the state figured out a way to cheat the general public and debase the money supply - making it less valuable and thus creating price inflation as a result.  So, even going back 2,000 years inflation was a problem also, even with gold coins in circulation as a medium of exchange. Interestingly enough though, the problem was not the use of gold, but rather the state and how they were tempted to debase the money supply - which is the same problem we have today as well.

This of course is a very important point in terms of governments, central banks, politicians, and when government has a monopoly over the issuance of money, be it gold or paper.  Which is to say, the tendency of government is almost always to debase the money supply or inflate the money supply in order to pay its own debts or expenses.  It is of course far easier politically for a government to simply reduce the gold content of coins, or simply print more paper money rather than asking citizens to turn over more money in the form of taxes.  In fact, the citizens are often not even aware of the inflation until after the fact, making it a sort of conniving stealth tax after the fact.  For this reason also, inflation is often referred to as a hidden tax against the population because just as with collected taxes, it reduces the spendable worth or assets of the citizenry and the culprit often enough is government in terms of how they manage (or not manage) the money supply.

We have just stated that governments are usually the culprits of inflation in terms of what they do (or not do) when it comes to the money supply that they alone control.  However, this is not to say that inflation under a gold-based system cannot occur for other reasons.  In the United States (and the world in general) from the period of about 1860 through 1890, gold coins were used a medium of exchange and bank notes or certificates were gold backed. However, during this period there was indeed price inflation.  The question is why?  Well, during this period there existed an unusual number of new gold discoveries made in Alaska, South Africa and other parts of the world.  This increased the supply of gold or the amount of gold in circulation as a result. Presumably more gold was discovered and put into circulation than was compatible with the rate of economic growth, and therefore - inflation, or devaluation due to oversupply.  The very same thing of course happened in Spain during the colonization of the Americas, as huge amounts of new gold flowed into the coffers and the local economy as well.  But these events are not common and are exclusively hinged upon the discoveries of large amounts of new deposits that make their way into the economy.

However, generally speaking, it is much more difficult to experience high inflation under a gold standard (gold backed paper money) or via the use of pure gold coins in commerce.  The reason is of course it is not so easy to produce new quantities of it.  You first must incur an expense to explore for it, then you must incur and expense to get it out of the ground, and finally it of course costs something to refine it and reshape it into coins or whatever.   Apart from all that, these things take time. Under a fiat paper money system, you do not have to do all that - you simply run the printing presses.  Can you see how easy and tempting it would be for a politician to do this?  Who would know, until after the fact of course?  So, the government can of course simply print more paper or create new money out of thin air and pay people with it, with the person receiving it thinking it is worth something when in reality over time, it becomes worth less and less as prices go up to compensate.  Using a system of gold back currency (paper money backed and redeemable in gold) or using actual gold itself as a medium can prevent the excessive and unwarranted kinds of inflation we have seen over the past 30 years (when the US went off the gold standard completely).

It used to be the case prior to 1933 in the United States, that private citizens could redeem paper money for gold.  Part of President Roosevelt's so-called New Deal was a raw deal for anyone one that did own gold at that time or US dollars as well, as all gold was ordered confiscated in 1933.  In addition, gold ownership by private US citizens (with the exception of jewelry and similar ornamental items) remained to be illegal up until January 1, 1975 (legislation was passed by then US President Gerald Ford that allowed for private ownership once again).  However, also in conjunction with the private gold confiscation of 1933, US citizens could no longer present paper money in exchange for physical gold as well, but central banks of other nations were still allowed to do so.  That changed in 1971 when President Richard Nixon, after seeing US gold stocks depleting rapidly from foreign banks actually redeeming for physical gold, promptly closed the gold window for foreign central banks as well.  The result - the Arab Oil Embargo.  Why?  Because those nations producing oil we not very pleased with the idea of accepting paper in exchange for the commodity (oil) they were selling.  They wanted something of value for their oil and not paper, but rather gold.  The result was an embargo and cut back on production by the oil producing nations.  The solution and what ended the embargo was the agreement that oil prices could rise in order to offset the paper inflation that would result.  So, just so you know, the so-called oil shortage of the 1970s was no shortage and it was not about oil - it was about gold, or a change in payment taking gold out of the picture.

So, the group of questions for someone to consider are as follows:

Do you think inflation is a problem that will not go away, or do you think that your government is seriously interested in cutting expenses, not spending more than what they are taking in - AND will they NOT be tempted to print more paper money than what is necessary going forward?

Do you think other commodity prices, such as the price of oil, will be going up or down in the future?  Do you think whatever the rate of inflation, will your salary or income increase to keep pace, or will it be more likely prices could riser higher than your earnings?  In terms of other looming government expenses, such as Social Security, do you think the politicians seriously want to tackle the problem today, or will they push it off until it is too late?  Will they simply elect to print even more worthless paper to solve the problem at a later date?

These are just a few questions, but important ones to determine what you think the economic future, and more precisely YOUR economic futures holds in store.  However, gold has always been called the peoples money, as anyone can own gold, and it is a commodity not in the exclusive control of governments either.  In fact, everyone should probably own some gold, as it is the oldest form or true money around, and it is the one thing the politicians cannot devalue or debase (unless of course they copy the Roman Emperor Nero and clip the coins).  Historically speaking, as paper money loses value (inflation) - gold along with other kinds of assets such as real estate do have the tendency to act as a hedge - rising in value in tandem to keep pace.

Of course there are some drawbacks to keeping large amounts of your wealth in gold.  The most obvious is that gold does not offer the chance for interest to be earned, and there might even be storage costs to safeguard it.  There are ways of course to loan gold, but this is neither practical nor very convenient for the average investor to do.  However owning gold can be part of an overall anti-inflation plan and can be an ideal alternative to holding fiat paper money. Remember: Gold is Global.  It trades virtually round the clock, all over the world.  It is liquid, and is accepted everywhere.  It can be difficult to have your current fiat paper money accepted in another country - but gold truly is universal and if the one form of money accepted in all countries.

About The Author: This article was written by John Schroder of Ascot Advisory Services.  John's firm has been helping clients in the Dominican Republic for the last 17 years with residency application services, naturalized citizenship filing, banking assistance and legal services pertaining to real estate (title transfers, legal representation at closing, sales contract review).  You can contact him by telephone at 809-756-1917 or click the about the author link above to reach a contact page to send an email directly.

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