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2010
29
Jun

Gold – Is It Currency?

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To answer this question we need to take a brief look at the history of money. Money was invented as a direct answer for mainly two needs: fast economic exchange tool and real value depository. In this context, real value means a value which has a direct correspondent in goods (and later, in services). From this angle, money is a representation of economic value and a widely adopted convention used to facilitate economic value exchange and circulation.

To become more than a concept and to be able to circulate, money needed physical representation. The physical representation of money is called currency. During human history, currency saw many forms, from pebbles to sea shells and weight measurement units, the general rule being that currency was represented by objects or goods perceived as having intrinsic value in an area.

This tradition continued in Europe for a very long time. Two long lasting examples of precious metal currencies are the golden Louis issued in France and the golden Sovereign issued in the Great Britain. Both currencies circulated for a long time, not only in the countries were they were issued, but in the entire Europe. Their large circulation area leads to the conclusion that their value derived from being made of gold, not from belonging to a certain economic area, as it is the case with modern currencies.

This system was institutionalized by many European states who adopted gold as their monetary standard. The main characteristic of the system was that the national currencies were convertible into gold at fixed ratios. Great Britain was the first to adopt the gold standard in 1717, followed by Netherlands in 1818, Germany in 1873, France and Spain in 1876. United States and Canada adopted the gold standard in 1853 and 1873 respectively.

This system lasted, with modifications and brief interruptions, until 1971. US, under the presidency of Richard Nixon, was the first state to end the convertibility of the national currency into Gold, marking the beginning of the end for the gold standard and the rise of a fiat currencies era. Fiat currency represent paper money which are not convertible into anything else and whose value is only back-up by public trust. This also leads to the answer to the initial question – is gold currency? And the answer is no.

This marked the end of the gold standard and the rise of a new era – that of fiat currencies. Fiat currencies are currencies created by national banks. They are not convertible into anything else and have no intrinsic value. This brings us back to our answer to the initial question – is gold currency? No, it is not. Gold today is a commodity. A very expensive one, one might add, whose value continues to grow, in spite of most difficult economic conditions. Gold represents an excellent investment for everyone in search of safe haven against inflation – which is seen as the major drawback of all fiat currencies.

Learn from professionals how to buy gold bullion in times of recession.

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