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The role of Gold

Published 22 Sep 2020

The role of Gold in history

Gold’s allure led it to become a symbol of immortality and power across ancient cultures since 5,000 BC. Gold’s rarity and aesthetic qualities made it an ideal material for ruling classes to demonstrate their power and position.

Gold was first issued as coinage in 800 BC, and was later used by the Greek and Roman empires. Throughout the 19th century, almost all Western nations adhered to a gold standard, matching monetary expansion with the value of its own gold reserves. 

Gold’s convertibility for fiat (paper money) began to end with World War 1 as countries refused to exchange their gold. Requiring money to pay for the war efforts, governments, led by Great Britain, chose instead to print money and refuse its exchange into gold. 

Following the Great Depression, the United States (US) Executive Order 6102 made owning gold coins or bullion illegal in 1933. Gold was exchanged at $20.67 per oz before prices quickly rose to $35, debasing the value of money by 40% overnight.

1971 – What did Nixon actually do?

As the US became more involved in Southeast Asian wars in the late 1960’s, US creditors, led by France, demanded exchange for their US credit for gold. After US gold reserves fell by over 50% in the 1960’s, President Nixon announced in 1971 that the US government would formally end US Dollar convertibility into gold.

With the shackles of gold released, governments globally quickly followed suit and recklessly overspent during the next 50 years. Gold’s response up 5,600% showed that excess spending comes with a price – monetary inflation and the loss of consumer purchasing power. 

Reserves – Who owns what?

US claims of 8,300 Tonnes of gold appear highly unreliable. Most European countries have also likely sold (or leased) much of their gold reserves over the past few decades. There is evidence Russia, India and China each own > 20,000 Tonnes, placing them in a very strong position if the US was either replaced or forced to share its role as a global reserve currency.

Food for thought ….

Historically, the role of gold is to offer an anchor for portfolios during uncertain times to protect investors’ purchasing power, especially when governments spend well beyond their means to stimulate economic growth. Our view is that the full cost of COVID-19 over the next decade will likely result in stronger gold prices. 

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