Topics Covered Hide
- 1 Assessing the concept of gold standard
- 2 Comparing the gold standard against the fiat concept
- 3 Understanding the value of money these days
- 4 Seeing the gold backed currency coming back
- 5 Get some physical gold
- 6 Get some paper gold
- 7 Get an offshore bank account
- 8 Get a dual citizenship
- 9 Conclusion
It was proof of opulence back then. No other country had something like that – the possibility to walk in the mall on a Thursday morning and withdraw some cash and a few grams of gold. Everything was possible with a credit or debit card.
Now, if you go back in the history of modern civilization, you will realize that money has pretty much always been backed by gold – officially or not. Despite the gold ATM gaining some popularity in the UAE, the country’s fiat currency is not actually backed by it.
In fact, it is impossible to find a gold backed currency these days, despite some countries maintaining this kind of finances. Switzerland was one of them, but it gave up the system decades ago – the same goes for the USA.
Assessing the concept of gold standard
The gold standard is basically a monetary system. If a government adopts such a system, it means the currency of the respective country is directly linked to gold. Its value goes up and down with the value of gold.Countries that implemented the gold standard could convert fiat money into a particular amount of gold. At the same time, such a government will set a fixed price for gold – that is the price gold is bought or sold for. The value is given by an ounce.
If an ounce of gold would be valued at $100, the dollar would be valued at 1/100th of an ounce.
At this moment, there are no countries out there using the gold standard. Many countries dropped it in the past. The UK left the gold standard in 1931. The USA followed immediately, in 1931. However, the system was still linked until 1973, and it was not officially dropped until that time.
Today, the gold standard is covered by fiat currencies. Fiat money refers to the official currency of a country. To help you get an idea, the Emirati dirham is fiat money in the UAE, while the American dollar is the equivalent for the USA.
The gold standard has been so widely appreciated because it affects the issuance of money. People are no longer in charge of this process, so mistakes are less likely to happen. The physical amount of gold is practically a limit for the money issuance, so the respective society could easily avoid inflation.
Apart from inflation, such a system would also keep deflation under control. Instead, it promotes stability and balance. Now, the concept is more of a rule. If seen as a rule, inflation can be avoided. But history also shows that strictly adhering to this rule can cause economic unrest.
Comparing the gold standard against the fiat concept
The name of this standard makes it pretty obvious – the value of a particular currency is defined by the quantity of gold. On the other hand, a fiat system implies a currency whose value is not linked to anything. Basically, the value will fluctuate randomly against other currencies.Pretty much anything can influence the value of the respective currency, from political moves and declarations to economic issues and successes. Gold, on the other hand, is not affected by such things – in fact, its value goes up with every new economic crisis.
Before the 20th century, international trade depended on gold – it was a classical gold standard. The trade was based on actual gold. Countries that exported goods gained lots of gold, while those with trade deficits lost gold for their imports.
Understanding the value of money these days
There is no such thing as a gold backed currency these days. While the concept was common ages ago, things have changed dramatically over the past century, so the answer is fairly simple – no countries in the world have this standard.While the value of money fluctuates – regardless of the currency, there is one unofficial rule out there. Money is worth whatever people believe it is worth. Take a look at currency fluctuations on a daily basis, for example. Who decides these values? Some people, are based on other people's actions.
This kind of idea can become dangerous in the long run. Take a look at Zimbabwe struggling in an economic collapse since the early 2000s. Hyperinflation drowned the local economy. With a silver coin, you could buy food for a few months.
Venezuela is a more popular example because the economic collapse in the South American country has often been featured in the media. Greece was in a similar situation more than a decade ago. Such ideas prove the destructive concept of fiat currencies.
Now, things get even worse as some currencies are pegged to other currencies, following them blindly. The UAE may showcase luxury and opulence, but the local dirham is pegged to the American dollar. It is not the only country in this situation.
Such countries believe that the American dollar will never fail. Governments are tied to it, as well as the people led by these governments. The dollar had ups and downs. History tells us that currencies have a limited amount of time in lead – a matter of decades only. At some point, someone in charge fails.
With these thoughts in mind, blindly following a currency, you have no control over seems like a bad idea. A central bank may implement destructive policies that will take down a bunch of different countries as well.
On the same note, people who fail to trust their governments choose to buy gold instead.
The depression in Argentina started in 1998. The depth of the crisis occurred in 2002 and showed that most people were poor and struggling. By the fall of 2001, people started withdrawing all their money to convert pesos into American dollars, causing banks to fail too.
Such an example shows that both currencies and banks can fall out of nowhere.
Another interesting example is President Roosevelt’s executive order 6102 in the USA. Signed in 1933, the order banned Americans from having gold, so everyone had to sell it for American dollars. The same rule applied to banks.
The government forced its population to lose wealth overnight. Furthermore, those who wanted to own gold needed to gain a license, which was almost impossible to get. But such a move benefits central banks.
Central banks and the politicians associated with them prefer the power to control the value of currencies. They can manipulate fiat currencies and gain from it – only a matter of politics. On the other hand, gold is a hard asset and has a long held value, so manipulation is out of the discussion.
This is why central banks and politicians do not want you to own it.
Seeing the gold backed currency coming back
Ever since the gold backed currency was dropped, the world has seen multiple economies collapse due to poor political systems and central banks. Poor management has caused starvation, hyperinflation, and death.Over the past few decades, more world powers have tried to find replacements to the American dollar. It is no longer desired as the world reserve currency. Despite many economies being tied to it, some world powers want to get rid of it.
Countries in the BRICS system – Brazil, Russia, India, China, and South Africa – have tried to come up with their own currency to go against the dominating American dollar. Other economies have tried to get rid of the SWIFT system responsible for bank transfers.
Things are slowly changing. Russia and China are some of the world’s toughest opponents against the American dollar. They tried to clear out this trend – it all started with China opening a renmibi clearing bank on Russian territory.
Russia did the same. The central bank’s first foreign branch in history was opened in China. The move strengthened the relationship between these two powers. The new system eases the possibility to clear transactions in gold, without worrying about the American dollar.
Both countries aim to make more and more transactions in Gold. It is going to be an interesting trend because both countries have managed to accumulate heavy amounts of it over history. Plus, other countries in the BRICS system are also known for their natural gold reserves.
In other parts of the world, other countries aim to avoid the petrodollar and push oil trading to hard assets.
Is cryptocurrency backed by gold?
The past couple of decades have brought in even more challenges to fiat currencies, as cryptocurrencies have started gaining notoriety as well. Some of them are more popular than others. Government tries to regulate them, but they are less likely to do it by the book.
Other than that, other countries have actually allowed them in. You can go into stores in the USA, the EU, Israel, Canada, and so on and pay in cryptocurrencies. Obviously, not all stores accept them yet, but the trend is definitely growing.
The secret is in blockchain technology, which is also responsible for top-notch encryption. While not real right now, gold backed cryptocurrencies might eventually kick in and represent a safer alternative to classic digital coins.
The blockchain technology is what makes all these possible. The technology was used way before digital coins became popular all over the world. In fact, digital coins only represent a small part of what the technology can support.
On the same note, both Russia and China are pushing hard to bypass the American dollar, and so far, they are doing a pretty decent job. Their trading systems are based on gold and can easily lead to a gold backed currency in the future.
The biggest losers? In terms of fiat currencies, the American dollar will most likely go down at some point – it has already had its peak. Bitcoin may also lose when compared to other coins. But then, gold will keep going up. This is also the reason wherefore so many countries stockpile it.
The necessity of a gold backed currency becomes more and more obvious. There is no such thing as a gold standard today, so you are less likely to benefit from it right now. But if you have a business mindset, you probably know already how important it is to diversify your assets.
On the same note, it has never been easier to diversify assets internationally.
All in all, here are a few helpful ideas to be on top should an actual gold standard show up.
Get some physical gold
Physical gold rules – no doubts about it. Forget about exchange traded funds, yet those investments are also worth some attention. However, they are not as trustworthy as the actual gold in your hands. This is the reason wherefore lots of people prefer to actually own coins and bullion.Now, there are lots of options when not sure how to buy gold. For example, you could get coins. Unless you get a whole chest of coins, you can easily store them at home, in a safe place. When it comes to bullion, you have two options – home or away.
Should you store lots of gold at home, you should get an insurance and perhaps some security. You might become a target. This is why most people choose to store gold away. Plus, it is worth noting that large bullion has a low spread and you can get rid of it in no time.
On the other hand, having some coins around will give you quick access to money straight away, regardless of what happens. It makes no difference what situation you end up in – gold coins provide quick access to cash. Moreover, you can trade gold against any currency out there.
A bit of education is also required in terms of gold because you could benefit from some tight spreads. As for bullion, you cannot just buy random pieces that may or may not give you some profit. Instead, opt for pieces that can be sold without too much hassle.
Storage is a completely different story. Offshore vaults could be a good choice. Sure, there are vaults all over the world – different vaults are backed by different companies. You can find vaults in Argentina or the Bahamas, as well as Switzerland or Austria.
A bit of privacy is desired, but safety is your main concern. You want a stable vault with a good reputation. You also want a wealthy hub where people hang around with millions, rather than a country that struggles financially.
Believe it or not, you can even borrow money against your own gold – like a guarantee. Compared to other assets, gold offers low interest rates. You can free up some liquidity when needed and gain a solid option against the American dollar.
Get some paper gold
Paper gold is not about owning gold on paper only – the classic ETF, yet such investments are quite common. Instead, you can get paper gold in a completely different way – a new and innovative way for some people.The concept is relatively new. You basically get paper money, but it has gold in it. Obviously, you are less likely to get too much gold in a piece of paper. The new currency is known as aurum. Back in the day, it came in papers, so you could hold it in your pocket, along with British pounds, euros or American dollars.
These days, aurum is a digital currency. It is designed to be secure, but also private. It is not as expensive as actual gold, but it is easy to use. Unlike other digital currencies, this one is not based on the actual blockchain. It is mostly aimed at institutions and governments.
The average individual will be skeptical about such a project. At the end of the day, it is not the first so called innovative solution brought in by a government – directly or indirectly. Now, is it worth investing in it?
It is totally up to you, but to many investors, this is a way to reinvent the wheel. No one is going to do that, despite all the innovative projects arising out of nowhere. If you truly want to buy gold, then buy gold – simple as that.
Get an offshore bank account
If you choose to keep money in a bank, how about a bank account that provides good interest? Local current accounts tend to give little to no interest, unless you have millions. In that case, you may end up with enough money to make up a monthly salary.To help you get an idea, a quick access savings account in the UK gives around 1% interest.
With these thoughts in mind, it pays off moving your money to countries providing super high-interest rates on savings. There is usually one condition – you need to save in the current currency. You might need to lose some money in the exchange, but you will make it up in no time.
Some countries offer up to 16% interest rates for savings accounts. On average, you get about 10%.
Take Georgia, for example. A savings account in Georgian lari providing 10% interest rates may not seem too attractive. But then, Georgia's economy is still developing and growing extremely fast. Plus, if you take a look over the past decade, you will see that the lari has been more stable than the American dollar.
With these thoughts in mind, you can keep your money abroad, make over 20% or 30% over a few years, then exchange it back when the rates look alright. Despite losing money on exchanging it, the deal is still good – usually a mid-term deal.
None of these currencies is a gold backed currency, but at least you have the opportunity to make some money. You also diversify your assets, so you are not stuck to a particular currency only. Holding the money abroad allows you to change it into any currency.
On the other hand, holding a local currency where you live may expose you to governmental mistakes.
Undecided? Imagine someone in Venezuela saving in a different currency over the past decade.
Get a dual citizenship
This is your opportunity to diversify yourself. The government’s policies aim to make the average citizen poorer. Imagine being an American during the gold confiscation project. Such things do occur regularly in more ways – such as tax.Why would you be their cow to milk then?
A second passport allows you to diversify yourself. Obviously, the idea is to find a passport in a more stable country. Superpowers can still do whatever they feel like – for example, Americans are double taxed if they work abroad.
Becoming a dual citizen will give you the opportunity to move around and travel. Opening bank accounts abroad is fairly simple too. A second passport may also eliminate some restrictions associated with your current country.
If things get too bad, you might as well give up on your nationality – you have a safety net then.
Conclusion
As a short final conclusion, there is no such thing as a gold backed currency these days. It used to be the main thing in the past, but things have changed throughout the 20th century. With all these, certain economies have failed – a new country collapses every now and then, proving that the system is wrong.The problem with the system is that it depends on people. Politicians are often poorly trained to make good economic decisions. In some countries, they make decisions with their personal wealth in mind, rather than the people they represent.
As a direct consequence, people are still considering gold as the best form to save money. Even governments see it as a stable resource, as many countries stockpile gold to ensure they are safe should the system change.
Economies have changed overtime, and things are likely to go wrong again, so having gold could keep you out of trouble.
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