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Gold – is it the only true currency or just another metal?

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Ah, gold. So beloved of microchip manufacturers, Bond villains and high-maintenance women. This shiny, ductile, (almost) chemically inert metal has powers of heat insulation and electrical conductivity and so is often used – albeit in small quantities – in industry. It looks nice on your wedding finger too. But gold is much more than an ingredient in manufacturing and jewelery, of course. It’s also a form of money.

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Gold has been used as a store of wealth for many thousands of years. For much of that time it was used as currency and the legacy of that is still with us, with some countries continuing to use the word ‘gold’ to describe their coins long after they ceased to contain any of the metal. For example, the Polish ‘zloty’ and the Dutch ‘guilder’ both stem from the word ‘gold’.

Gold’s rarity is the main reason for its value; you can’t manufacture it (not without dying very quickly from radiation poisoning), so the only new gold is the relatively small amount that’s dug out of the ground each year. This helps keep the price high and also remarkably stable over the long term. An ounce of gold is always worth an ounce of gold.

That sounds like a stupid statement until you compare it with ‘a pound sterling is always worth a pound sterling’, which is actually false: a pound sterling today is worth about 5% of what it was worth 70 years ago. It’s also worth about 97% of what it was worth this time last year, depending on which inflation index you happen to trust (if any).

This matters. You’re probably tired of your grandparents telling you that when they were kids you could buy half of Shropshire for fifty quid and still have tuppence left for a slap-up meal at The Ritz, but they have a point. Not that they were actually richer, of course, because their wages would have been drastically lower – in terms of today’s pounds – than now, but you could buy a lot more for your pounds back then.

We’ll look at the reasons for this inflation in a future article, but put simply, paper currencies devalue over time almost without exception: look at Zimbabwe for an accelerated example of this. As the years go by, the money in your pocket loses value bit by bit. That’s one reason why banks have to pay interest on your savings and why they charge it on your loans, over and above their own profit margins.

Gold doesn’t devalue, at least not in the same way. It’s been said that an ounce of gold would buy you a decent suit or 400 loaves of bread at pretty much any time in recorded history. There are gold price fluctuations from day to day, month to month and year to year, but unlike paper currencies that always tend towards a value of zero, the price of gold can go up as well as down, and often does.

In particular, gold tends to go up at times when the currency in which it is denominated is being deliberately inflated. When a country’s economy starts to get a little shaky, central banks and governments are sometimes tempted to increase the amount of money sloshing around the system in an attempt to spend their way out of trouble. And at other times inflation happens despite their best intentions. Either way, if interest rates aren’t increased to a sensible level to combat *real* inflation, gold starts to look rather more attractive to investors as a way of preserving their wealth, and its price goes up.

Gold is also seen as something of a safe haven in times of war, strife, stock market volatility and any other geopolitical uncertainty, although its actual correlation with any of these types of event is questionable and hard to prove. For various reasons, over the past few years the price of gold has risen quite significantly. In fact it’s worth about three times (in pounds sterling) what it was worth when Gordon Brown sold off a large chunk of the UK’s gold bullion reserves in 1999, right at the bottom of the market. D’oh.

People who believe that all paper currencies will fail and that gold is the only true currency are known as gold bugs, and tend to have a large proportion of their net wealth invested in gold. Other people believe that gold is antiquated as a form of wealth and far too inflexible to be as useful as today’s largely electronic currencies.

And, somewhere in between, you’ll usually find that financial advisers will recommend owning a small amount of gold – maybe 5 to 10% of net investment wealth – just in case your favourite economy goes the way of Zimbabwe. The argument goes that you might not make any money from gold (actually it has a negative yield because it costs money to store it), but if all your paper currency becomes worthless overnight at least you won’t be completely broke.

The truly paranoid store their gold overseas (Switzerland is a popular location due to its banking secrecy laws) to prevent confiscation by the government of your own country in times of real trouble: something along these lines happened in America in the great depression of 1929. We’re heading into ‘tin foil hat and bunker in the garden’ territory at this point in the article, though, and arguably a better investment for that sort of scenario would be food, water, bartering skills and a good level of fitness. After all, there’s not much point having gold in a financial armageddon scenario if a bloke with a large knife comes along and steals it from you.

 

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