Gold, Silver and Money

Gold and silver, due to their scarcity and unique chemical properties, fulfill the three main functions of money: wealth preservation, unit of account and medium of exchange.

Thus, naturally, both metals have been used since Antiquity. Nearly 4,000 years later, gold and silver are still legal tender in four states: Texas, Louisiana, Oklahoma and Utah.

 

 

As a matter of fact, until August 15, 1971 and the announcement of the end of dollar convertibility into gold by President Richard Nixon, gold was at the center of the international monetary system.

Our fiat currencies (dollars, euros, yen) are no longer convertible and their value depends solely on the trust we put into them. If we ever lose this trust, they will go back to their intrinsic value, i.e. the value of the paper on which they are printed. In fact, printed money only accounts for a small portion of the money in circulation. Most of the money is actually scriptural money, bank deposits, and accounts in computer systems. What we call money has no intrinsic value.

Historically, all fiat currency experiments, without exception, ended with the same result: total loss of the currency’s purchasing power. The most glaring examples of hyperinflation were the Assignats in France (1716-1720), the Deutschmark in the Weimar Republic (1923)—which lost all of its value in just a few months—and the Zimbabwean dollar between 2000 and 2008.

Since the start of the 20th Century, the US dollar (the world reserve currency) has lost 99% of its purchasing power compared to gold. The emerging countries, the BRICs, main holders of dollars via U.S. Treasuries (U.S. government-issued debt), are aware of this trend and are exchanging their dollar reserves for tangible assets such as gold. This is a major signal of the loss of confidence in the monetary system.

This does not only concern the US dollar. Globalization and de-regulation of the banking sector, allowing financial instruments such as derivatives, have created such a complex and interconnected system that a slide in real estate prices could bring about the bankruptcy of insurance companies, pension funds or banks. On the scale of a small economy like Greece’s, the whole financial system could go bust. This is what is called systemic risk. In 2008 we witnessed what an economic collapse could look like, but central banks chose to “bail out” the system by injecting trillions in new liquidity into the economy, thus creating even more debt. They just kicked the can a little further down the road. And today, the risk is even greater.