The Silver Dollar Economy

Investing in gold or any precious metals like silver has always been seen as a political and a pre-emptive move to in struggling economies. Gold is eternal, it is the one commodity that holds its value and it is for this reason that people still prefer investing in the yellow metal market than in anything else.

However, buying gold shows a level of doubt about where the economy is going and what would become of society when the economy heads in a particular direction. People buy gold bullion to preserve their wealth, but the biggest chunk of gold in the world is bought by central banks. When central banks start buying tons and tons of gold it’s usually some signal that hard times are coming.

Let’s take a look back to 1875 when the so-called Gold Standard was at its height. Gold meant money as physical coins as well as the official measure of the value of bank notes. At the time the gold reserves were at 1,100metric tonnes. In 1999 the World Gold Council reported that there were about 3,000 metric tonnes of gold in the world. Most of that gold was in private citizen’s hands and the gold standard was regarded as a symbol of honour and decency. It was simply the way that private investors the world over chose to meet and trade their gold. Gold was not a nationalised commodity that it has become today.

In 1895 about 6,100 metric tonnes of gold was in private hands whilst 2,759 metric tonnes was in the hands of central banks. In 1905, the balance of power shifted. Now only 3,916 metric tonnes of gold were in private holdings and 4,710 was held by central banks.

At the beginning of World War One Germany and Russia owned some 8,100 tonnes in bullion. In 1914, nationalized gold reserves were amounted to 20% of all the gold ever mined up to that point in history. When the war ended the economic disaster that followed only sped up the nationalization of gold.

Governments sucked all the gold that private citizens held in their own vaults. The United States were quick to seize gold from private owners and in the 1930s the U.S government made it illegal to own gold. People were forced to sell their gold. Investors found with hidden stashes were required to pay a hefty fine or face jail. As if that was not enough , Franklin Roosevelt devalued the dollar taking the price from $20.67 to $35 per ounce. At this price foreign gold started pouring into U.S. vaults.

So why rehash this history? Well because central banks have been making moves on gold again. Venezuela wants it’s gold back from London, Russia’s central bank is buying gold in unprecedented volumes, France wants its gold from the Bank of England.

Gold trades are currently fine in London. Switzerland occupies the No.2 position behind London. In recent years, China has been solidifying its stance as the world’s biggest producer and consumer of gold. China presents a great challenge to London as a global gold hub. It will be an even bigger challenge for London and the rest of the world. If China ends the ban on gold exports. After all, China is the No. 1 miner and consumer of gold in the world. Their government has been buying other countries’ gold for at least a decade. The global flow of gold is already pointing to gold going east. We can only hope that Beijing doesn’t decide to nationalise and control all that bullion, if they did, it would make it harder for the rest of the gold producing world to make the kind of money they are making now.

Considering our current global economy of quantitative easing, digitized credit and subzero credit, a gold standard would bring economic tension and strife. It would make countries ignore the importance of improving the business climate. During the great depression in the U.S. the Federal reserve raised its interest rates to make the dollar more valuable, but by doing so, they failed to stimulate the economy. Government action to hoard and protect their gold caused fluctuations in the economy. In fact, the U S economy ended up going through five successive recessions because of this.

Will we ever go back to the gold standard? There are enough advocates for it, but can we withstand the catastrophes that come with it? Common sense says no but of course there are others who are clamouring for a return to a gold standard. One can only hope that wisdom prevails.

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