Why Gold?

Value of Gold

When most people think of “money” today the idea of cash usually comes to mind first and then possibly a credit line; but how often is gold considered a legitimate form of money? If you ask some of your friends, families, and/or co-workers that question the chances are that most never contemplate the monetary aspects of gold, which is too bad since gold is more than just a pretty looking metal. Gold is a commodity with real monetary value that can be bought and sold for cash, it provides a hedge against inflation as well as economic and political instability, and has always had value throughout human history. When one considers these factors along with the uncertainty of financial markets and the simplicity of investing in gold, it quickly becomes apparent why gold is valuable and will continue to be so in the foreseeable future.


Practical Reasons for the Value of Gold

There are many reasons why gold has a monetary value, foremost is that it acts as a hedge against inflation. Inflation is the process whereby a given currency diminishes in value, which then creates a rise in the prices of goods, but especially consumer goods such as gas, food, and clothing. Inflation is often caused by the excess “printing” of money and although periods of inflation are cyclical, it is important to note that the U.S. Dollar’s value has declined by 90% since 1950. As stated above, during inflationary periods commodities tend to increase in price, which also includes gold as it too is a commodity. The monetary value of gold not only rises during inflationary periods, but also when financial markets become volatile.value-of-current-dollar-vs-1Financial markets, like inflation, follow cyclical patterns and similar to inflation the value of gold as a safe-haven increases when the markets experience volatility. The cyclical, or one could say capricious, nature of modern financial markets has the ability to not only put a hole in personal investment portfolios, but to damage the confidence in entire economies. One only has to look at the 1929 market crash that precipitated the Great Depression or the ones of 1987 and 2008 to see that financial markets can be very unstable places. Even IRA’s and mutual funds, no matter how conservative, are subject to the whims of the market and can wipe an investor quickly if a crash takes place. Gold on the other hand has no liability attached to it. Yes the value of gold rises and falls according to the opposite cycle of markets, but gold is relatively stable. Inflation and financial market declines are two reasons that drive up the monetary value of gold, but the very nature of modern economies also contribute to gold’s value.

Cash as we know it is becoming more and more obsolete. Most people pay for goods with debit or credit cards and increasingly the level of personal debt that individuals have incurred as the result of credit cards, student loans, mortgages, and car loans is becoming unmanageable. The situation is even worse for most governments, which includes supposedly fiscally responsible governments. More and more nations are finding themselves in debt to other nations and banks to pay for even the most essential services and some are finding out that it is a debt that is for the most part insurmountable. Debt is a major factor in creating inflation because as nations look for ways to make payments to their debtors, they are increasingly printing more money, which as noted earlier, devalues the currency and increases inflation. Debt is quickly becoming a crisis in many countries as can be seen in Greece and most graphically in Cyprus during 2012-13. The debt crisis in Cyprus got so bad that it created a run on banks that led to the government freezing most people’s accounts – they were not allowed to withdraw cash until the crisis was deemed over. As the debt crisis creeps into more and wealthier nations, the winner, if there is one in such a situation, is gold. Gold’s value not only increases during a debt crisis, but those in possession of the precious metal can use it barter for necessities even when the banks are closed.

Another reason for the monetary value of gold is that it is a simple investment. Gold, especially physical gold as opposed to gold futures, is tangible and can be held, stored, traded, or gifted. What does this matter? It matters because it provides a psychological effect that cannot be found in the often abstract realm of the stock market. A gold owner knows how much he/she possesses and in a similar vein, the prices of gold are easy for investors to follow. Easy access to resources allows anyone to educate him/herself on the monetary value of gold and how to properly invest in it. Gold is also simple to purchase; if one has the money he/she can buy varying amounts of gold from a number of reputable dealers, jewelry stores, and even pawn shops. Because gold is a simple investment it therefore helps increase its monetary value.

The Value of Gold throughout History

Besides the practical reasons for the monetary value of gold discussed above, one only has to conduct a brief survey of world history to determine that gold has always had inherent monetary value, even in times of distress and so-called “dark ages.” The first written records of gold being used in a monetary context come from ancient Egypt. During what historians call the New Kingdom (ca. 1550-1000 BC), Egypt was at its cultural, military, and economic apex, which was supported largely by its numerous gold mines. Diplomatic letters between the kings of Egypt and those of Babylon, Assyria, and the Hittites relate how the Egyptians traded gold for horses to pull their chariots, timber to build their temples and boats, and precious stones like lapis lazuli to create their magnificent works of art. In fact, gold was so plentiful in Egypt that leaders of the other kingdoms proclaimed that, “gold is like sand in your kingdom so send us more.” Although most of the great kingdoms of the Bronze Age Near East collapsed in waves of invasions that engulfed the region around the year 1200 BC, gold retained its value and continued to be used.

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As the world emerged from the dark age inflicted on it by roving bands of marauders, a new political order emerged, but it was one that valued gold as much the previous system. By the sixth century BC the Persians established an empire that stretched from what is today Afghanistan to Egypt and from Turkey to Saudi Arabia. Controlling such a vast empire was no easy task, but the Persians did a fine job through a variety of methods that included: a complex system of roads, a postal service, and above all by standardizing a currency based on gold coins. The Persians knew the monetary value of gold so they used it to run the day to day operations of their empire as well as to build their great cities and monuments, until their empire was conquered by Alexander the Great in 330 BC. After the collapse of the Persian Empire the focus of power in the world moved to Europe, but gold’s monetary value continued.

Both the Greeks and the Romans used gold as a standard form of currency in both of their societies. In fact, gold was so important that it was partially responsible for the start of the Peloponnesian War (431-404 BC) between Athens and Sparta. As Athens grew in power in the middle of the fifth century BC it decided to move the treasury, which was comprised primarily of gold, from the city of Delos to Athens. After Greece was consumed by the growing Roman Empire 146 BC the value of gold continued to grow with the Romans who engraved their emperors on coins and used the metal to fund their colossal army. When the Roman Empire finally collapsed in 476 AD Europe entered the period known as the Dark Ages where civilization regressed for hundreds of years, which left the continent poor and backwards.

Despite the poverty that the Dark Ages inflicted on Europe, the monetary value of gold did not diminish; in fact, gold reestablished itself as a currency among the kings, feudal lords, popes, and bishops of medieval Europe. As the various kingdoms of Europe grew into nation-states they all searched for new sources of gold. As the gold mines of Europe were exhausted the price of gold climbed until the discovery of the Americas.

The discovery of the Americas created a new political and economic system in the world where gold played a vital role. As the Spanish conquered and explored what would become central and South America during the 1500s, they discovered vast amounts of virgin gold and silver supplies. The Spanish used these new sources of gold and silver to fund their armies and build an empire that lasted for nearly 300 years. Although gold helped propel the Spanish to never before seen heights of power, they soon found out that the immense amount of gold they introduced into the world market had the adverse effect of lowering its price. The Spanish learned that although gold has a definite monetary value, it also has its limits and is subject to devaluation like anything else. Since the Spanish introduced so much gold into the world market its price dropped and the Spanish soon learned that without its optimal value they could not hold their empire together.

The excessive introduction of gold into the world market by the Spanish never ended the monetary value of gold, it just merely lowered its price for a while and before too long gold’s value began to climb once more. Even in more recent history gold was still used as the monetary standard in most nation-states. In the United States paper currency was backed by gold until President Roosevelt signed the Gold Confiscation Act into law in 1933. Under the law citizens were only allowed to own small amounts of gold and people could no longer redeem tangible gold with paper money. Towards the end of World War II the major Western powers of the world agreed to follow what was known as the Bretton Woods system. Under this system the dollar was once again backed by gold at $35 an ounce, but such an arbitrary system was doomed to fail; in 1971 U.S. president Richard Nixon defaulted on the system, which once more meant that paper money was longer back by gold. It should not come as a surprise, and is no coincidence, that the rapid decline in the value of the Dollar has taken place in the years since Roosevelt took the U.S. off the gold standard.

A Source of Never Ending Monetary Value

A brief examination of gold reveals that there are several practical and historical reasons for its monetary value. Gold has proved to be a hedge against inflation as well as instability inherent in modern stock markets and even governments. Gold is simple to invest in for those who are willing to do a minimal amount of research and have the proper amount of cash, which further enhances its monetary value. Finally, perhaps the strongest argument in favor of gold’s monetary value is its performance throughout human history. From the ancient Egyptians until the present day gold has always held value and even dark ages, wars, pestilence, and famine have not eliminated the monetary value of gold. Gold’s prices have fluctuated throughout history, but there has never been a period or culture where it has not had value. One does not have to be a historian or futurist to know that gold will continue to hold its monetary value well into the future.

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