I’m posting this from UBS on gold.
- Zimbabwe has announced its latest attempt to create a national currency: a gold-backed Zimbabwean dollar. Events like this excite the “gold bugs” – Tolkienesque characters who believe that gold is the only true currency that has ever existed. This is a misunderstanding of history.
- Before the 19th century, gold was rarely used as ordinary currency. Credit or “book money,” the fiat currency of the time, dominated ordinary transactions, and silver was the preferred precious metal. After a furious debate in the early 19th century, the United Kingdom declared that one pound was equivalent to 113.0016 grains of gold. However, less than 2% of the pounds in circulation were actually backed by gold.
- The idea behind a gold standard is that a currency becomes tied to a commodity with a stable value. The big problem is that gold does not have a stable value. Like any other commodity, its relative value rises and falls. For example, in September 2022, milk prices in US dollars increased by more than 16%. In gold terms, milk prices are up over 23%, representing dangerously high inflation.
- Gold-backed currencies experience both inflation and deflation in volatile economic cycles, as the demand for liquidity and the value of gold shifts relative to other commodities. A gold-backed currency does not guarantee price or economic stability.
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Meanwhile, the price of gold has soared. Which means that even if you don’t like UBS’s comments, they are right about its unstable value:
This article was written by Eamonn Sheridan at www.forexlive.com.
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