Gold: The Forgotten Money?

Gold: The Forgotten Money?

Gold as a Form of Money

Gold may seem like a strange choice for inclusion in a series of articles on the future of money. Observers are well aware that gold has served as money — usually the best form of money — for over 3,000 years of civilisation, and perhaps longer.

However, in the 20th century, gold lost its role as money in slow stages. In 1914, most gold coins were surrendered to banks in order to boost gold reserves needed to finance the First World War. Citizens accepted paper bank notes in exchange.

In theory, the bank notes were redeemable for gold, but were seldom redeemed. The physical gold was still around, but it was melted and recast as 400-ounce bars held in bank vaults. Banks claimed the notes were still backed by gold, but the gold rarely saw the light of day. No one went shopping with 400-ounce bars in their purse.

A slow-motion gold heist

When the war was over, the gold heist accelerated. Between 1919 and 1933, central banks required commercial banks to surrender their gold bullion in exchange for credits in their reserve accounts. Then certain finance ministries required the central banks to surrender the gold to the national treasury in exchange for gold certificates.

Then countries themselves began to devalue their currencies when measured in weight of gold. The US made it illegal for citizens to hold physical gold. Shipments of gold between nations were halted again in 1939 with the outbreak of the Second World War.

In 1944, the Bretton Woods agreements revived gold as money, but only for international transactions and balance of payments settlements among the major countries that signed the agreement. Currencies of the Bretton Woods signatories were pegged to the US dollar and the dollar was pegged to gold at US$35 per ounce.

In March 1965, the requirement that commercial bank deposits be linked to the level of gold reserves was eliminated. In March 1968, President Lyndon Johnson signed a law that eliminated the ‘gold cover’ requirement that Federal Reserve notes be covered by at least 25% physical gold held by the Treasury.

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In August 1971, President Richard Nixon suspended the redemption of dollars held by foreign trading partners for physical gold. By 1974, all major currency issuers had moved from fixed to floating exchange rates. In 1978, the IMF ended the obligatory use of gold in transactions between the IMF and member nations. By then, governments and the IMF held all the official gold in the world and gold was no longer counted as money. Gold has been practically forgotten as money — but not quite.

De facto dormant money

Despite the official demonetisation of gold, it has remained a form of money de facto. In total, official gold reserves of all sovereign powers are 35,219 metric tonnes — about 17.5% of the total estimated above-ground gold in the world.

The fact is that gold remains the most powerful and reliable form of money. Sovereign states do not want to acknowledge this fact because it diminishes the power of their preferred alternative — command currencies issued by central banks. The size and timing of command currency issuance give countries enormous power over economic growth, employment, and wealth accumulation within their jurisdictions and globally in the case of the US.

Physical gold was adopted as a form of money in the age of central banks (1668–2021) as a way to support confidence in paper bank notes (gold was actual money in the form of coins and bars long before bank notes came into use). Over the 20th century, the link between gold and bank notes was gradually erased, but the gold itself never disappeared.

Today gold is still money, but it is dormant as a form of currency. It retains its role as a store of value and unit of account, but it is used as a medium of exchange by appointment only. The days of exchanging eight-gram gold coins for goods and services are over for the time being.

The moment gold is waiting for draws near

In its store of value role, gold is poised for major gains in response to the rise of inflation expected in 2022 and later. This inflation will not be caused by so-called money printing. An expansion of the money supply without accompanying changes in saver psychology that affect velocity or other exogenous catalysts has little impact on consumer prices. The driver of inflation is velocity, or the turnover of money caused by lending and spending. Velocity has been plunging for over 10 years.

Still, an exogenous catalyst of velocity will arrive soon and last for decades in the form of higher wages needed to offset declining working-age populations around the world. This wage increase will be driven in part by the diversion of workers to healthcare for seniors, which is needed work, but not amenable to productivity increases.

Once this demographic wave hits, saver psychology will shift quickly, and cost-push inflation will feed on itself. Inflation combined with decreased confidence in central bank command money will move gold to US$10,000 per ounce or higher. That is the implied non-deflationary price of gold needed to act as a backstop for command money.

Digital gold money

Beyond that, gold’s role as a medium of exchange will most likely be restored by combining physical bullion in secure storage with digital payments systems backed with gold measured by weight. Your ability to buy or sell goods or services would be conveyed through a digital token stored on a mobile phone or chip card.

After each purchase, your gold account would be reduced by the amount spent based on the market price of gold at that time. Your account could be topped up with new purchases of gold from the account sponsor.

This kind of gold-backed currency account could be extended through linkage to new central bank digital currencies (CBDCs). A digital interface would replace the gold coin, while bullion in storage would reconstitute a gold standard for the 21st century. In the end, the dollar would be little more than a counting mechanism while the wealth preservation and purchasing power functions of money are slowly ceded to gold.

All the best,

Jim Rickards Signature

Jim Rickards,
Strategist, The Daily Reckoning Australia

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