1.1 Gold is the only Real Money
Gold has always been regarded as the most precious metal and has been highly sought after
as a coveted asset since early human civilization. Coins containing gold appeared around
800 B.C., and the first pure gold coins were struck during the reign of King Croesus of Lydia
about 300 years later. Throughout the centuries, people have continued to hold gold as a
traditional currency and as an asset. Despite tremendous advancement in industrialization,
finance and commerce, this tradition still remains strong and relevant today.
As early as the Byzantine Empire, gold was used to support fiat currencies, or the various
currencies considered legal tender in their nation of origin. Gold was also used as the world
reserve currency up through most of the 20th century. One of the key reasons for its use is
that it limited the amount of money nations were allowed to print.
However, the United States used the gold standard only until 1971 when President Nixon
discontinued it. Until the gold standard was abandoned, countries couldn’t simply print their
fiat currencies ad nauseum unless they possessed an equal amount of gold. Although the
gold standard is no longer used in the developed world, many economists have expressed
strong views that we should return to it due to the volatility of the U.S. dollar and other
Investors typically buy large quantities of gold when their country is experiencing high levels
of inflation. The demand for gold increases during inflationary times due to its inherent value
and limited supply. As it cannot be diluted, gold is able to retain value much better than other
forms of currency.
For example, in April 2011, investors feared declining values of fiat currency and the price of
gold was driven to a staggering $1,500 an ounce. This indicates there was little confidence in
the currencies on the world market and that expectations of future economic stability were
Gold has a profound impact on the value of world currencies. Even though the gold standard
has been abandoned, gold as a commodity can act as a substitute for fiat currencies and be
used as an effective hedge against inflation. There is no doubt that gold will continue to play
an integral role in the foreign exchange markets.