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Gold and Silver Rise Again as History’s Chosen Currencies

By Ron Robins, Founder & Analyst, Investing for the Soul

Blog Enlightened Economics; twitter

First published February 25, 2011, in his weekly economics and finance column at
alrroya.com

Gold, “the ancient metal of kings,” is reasserting itself as the currency of choice as it
has done again and again since the earliest of human times. In our modern era, as
central banks and governments fight to devalue their currencies to gain purported
trade advantages, gold rises in value against them all. And central banks are buying
gold again amidst serious doubts as to the size of some of their real physical gold
holdings. Silver too is experiencing a similar re-emergence. The reasons for gold
and, to a lesser extent, silver acting as currencies, are easy to understand.

Gold’s history as a currency extends back thousands of years. The western world’s
first known standardised minting of gold currency took place in 564 BCE by King
Croesus of western Asia Minor. However, it is also believed that China in the fifth and
sixth century BCE, minted the Ying yuan gold coin as well. In the great Gupta Empire
of India, from 320 to 550 CE, gold coins were used throughout its domain. And in the
early Islamic world around the time of the Prophet Muhammad, the gold dinar coin
led as its currency. In Europe, gold coins became an important or central monetary
unit for the Greeks, Romans, Venetians, Dutch, Spanish and British.

During approximately 1870 to 1910 all major countries linked their currencies to
gold, thereby adopting the gold standard. However, China was the exception
preferring a silver-based standard. The first silver coins are reported as being minted
by King Pheidon of Argos around 700 BCE.

Gold and silver have historically asserted themselves as monetary mediums due to
their intrinsic value. They are consistent, divisible, durable and convenient, and they
are nobody’s liability.

Unlike paper money, gold, particularly, has proven itself in maintaining its value over
many centuries. The World Gold Council (WGC) says that, “since the 14th Century,
gold’s purchasing power has maintained a broadly constant level… an ounce of gold
has repeatedly bought a mid-range outfit of clothing… in the fourteenth century… in
the late 18th century and… at the beginning of this century (2000 to 2008)… On the
other hand, the US dollar that bought 14.5 loaves of bread in 1900 buys only 3/4 of
a loaf today. While inflation and other forces have ravaged the value of the world’s
currencies, gold has emerged with its capacity for wealth preservation firmly intact…
[whether] in the face of financial turmoil… [as] a crisis hedge… [or] as an inflation
hedge.”

Since their origins, central banks have realised the importance of gold, and
sometimes silver, as a strategic part of their reserves. Commenting on the rapidly
rising price of gold, Alan Greenspan, former chairman of the US Federal Reserve,
said in a Bloomberg report on September 9, 2009, that, “[the rising gold price is] an
indication of a very early stage of an endeavor to move away from paper currencies…
What is fascinating is the extent to which gold still holds reign over the financial
system as the ultimate source of payment.”
And this is also because, “[the central banks] no longer trust each other… [and]
there's this perception that different countries are trying to weaken their currency in
order to get a competitive advantage," said Francisco Blanch, head of global
commodity research at Bank of America Merrill Lynch at a New York City November
2010 conference, reports Fastmarkets. Among the countries whose central banks are
increasing their gold reserves are China, India, and Russia—all countries with
mammoth trade surpluses and foreign exchange reserves.

However, as throughout history, he who owns gold and how much he owns is often
shrouded in secrecy. For a central bank, covertly selling and buying of gold and its
currency can be used to secretly manipulate the value of its currency. Some indirect
proof of this comes again from Mr Greenspan during testimony to a US Congressional
committee in 1998. He remarked that, “central banks stand ready to lease gold in
increasing quantities should the price rise.” Therefore, declaring the precise gold
holdings of a central bank might be akin to giving away ‘trade secrets.’

Central banks worldwide supposedly hold around 30,000 tonnes of gold, perhaps 20
to 25 per cent of all the gold ever mined. But true independent verification of their
holdings is not available. The US based Gold Anti Trust Committee (Gata) has
compiled extensive and critical information concerning western central bank gold
holdings. Their information and that from other sources suggests the actual physical
gold holdings of some western central banks could be 30 to 50 per cent lower than
publicly reported.

As an example, the US boasts official gold holdings of 8,133.5 tonnes. However, it is


known that some, perhaps a significant portion of these holdings, have been leased
out to various financial entities and might not be returned without huge financial
losses. Ron Paul, the chairman of the influential US Congress’s Domestic Monetary
Policy Subcommittee of the House Financial Services Committee, is so concerned
about such activities that he is calling for a full public audit of US gold holdings.

Additionally, gold is possibly set to play a reinvigorated role in the international


monetary system. The International Monetary Fund (IMF) as well as most members
of the G20 are seeking alternatives to the US dollar as the world’s principal reserve
asset. And in this regard, gold—perhaps silver too—could be included in a basket of
currencies and commodities that create the basis for a new international unit of
exchange (currency).

Moreover, an RBC survey of global financial executives and business leaders reported
on Yahoo! Finance on February 3 that “just 52 per cent of respondents expect the
dollar to be the world's currency in five years,” and that “gold is coming back as a
reserve currency ‘of sorts,’” says Marc Harris, head of global research at RBC Capital
Markets.

Probably since the beginning of civilisation, gold especially, but silver as well, have
served as monetary vehicles. Gold has demonstrated itself to hold its value over
centuries and in many diverse cultures. And despite today’s sophistication with paper
money, gold is still seen by central banks as the ultimate source of payment.
Concerns are growing that the real physical gold holdings of some major central
banks might be substantially lower than they have reported, and as they
unabashedly devalue their paper money, gold and silver rise once again as history’s
chosen currencies.
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