The bull case for gold

Gold is becoming more and more attractive as more and more dollars are being printed by the federal reserve. As the dollar is becoming worthless, gold is becoming the safe haven currency to many.

By Garry White
12:25PM BST 08 Aug 2011
The Telegraph

Gold is not a commodity it is a currency – and the devaluation of paper money by money printing is making it more and more attractive.

The metal was desirable long before the concept of money was ever invented - and it has been used as a medium of exchange for thousands of years. (The first gold coins were minted in Lydia, in modern-day Turkey, in 610 BC).

The money in your pocket is effectively worthless. The government declares it as legal tender and will accept taxation payments with this bill of exchange but the £5 note is no longer backed by anything. When push comes to shove, a £5 note is just a piece of paper and ink with no intrinsic value at all. It certainly isn't worth £5.

Fiat currencies are not backed by gold. When most currencies were on the gold standard, a unit of currency could be exchanged by central banks for a fixed weight of gold. That way, paper money could be used instead of using gold or silver coins.

The world’s monetary system used to be backed by gold – until Richard Nixon scrapped the dollar’s convertibility into gold 40 years ago. This made the dollar the defacto reserve currency, but successive administrations have mismanaged government policy and the US economy is now drowning in a sea of debt.

Because of the policy responses to the current crisis, the world’s reserve currency is becoming less desirable – and there’s no sign of the US sorting this problem out. Friday’s S&P downgrade of the US’s credit rating emphasised this.

Discussing the S&P downgrade of US debt, Commerzbank said this morning: “It is a clear signal to market players that also government bonds do not offer complete security.” They don’t offer real security because they are all based on fiat currencies. The only real alternative is gold.

The history of fiat currencies is unsurprising. All have failed. The Roman denarius, a silver coin, was diluted from 100pc silver to 84pc, then 43pc and finally to 0.05pc until nobody would take the coin as a means of exchange because it had no value.

Scottish economist John Law became the most hated man in France 300 years ago. He had to flee to Italy after introducing a fiat currency that almost brought the country to its knees. History shows that fiat money loves failure.

Gold is by no means expensive. Its inflation-adjusted high, reached after the 1970s oil crisis, is about $2,300. Central banks around the world – including China and South Korea are buying again - and investor demand couldn’t be higher.

Gold is a safe haven in turbulent times – and it is going to take years to untangle the mess that has been made of the world’s financial system.

Gold is the only alternative to fiat money – and that’s why it will move higher.

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