Saturday, July 11, 2009


Did you know that gold is much more of a currency than a commodity? In fact,  Gold was the main currency in most of Europe, Asia and the Americas up until 1971. As a rare and precious metal, gold has naturally evolved into a global currency of choice in the last 5,000 years...the only form of currency that was not created nor controlled by a government! (Read More)

Up until 1971, any currency is convertible to gold.You could at any time exchange a unit of the world's main government currencies for a prescribed amount of gold. Currency notes then served as certificates for various weights of gold.

In 1944, through the Bretton Woods Agreement adopted by major nations immediately after the second world war, every major currency of the world was pegged against gold whose value was fixed then at $35 per oz. The agreement was meant to stabilize financial stability among nations and impose a common monetary policy for the then chaotic monetary situation gripping the whole world after the war. The Bretton Woods Agreement had the original purpose of rebuilding economies after World War II through a series of currency stabilization programs and infrastructure loans to war-ravaged nations. The concept was a good one but in actual practice many nations pegged the value of their currencies against the US Dollar rather than gold - the US being the dominant economic force then and at the same time holds 80% of the world's gold reserve. The US dollar became the global reserve of choice among many nations.

 The Bretton Woods Agreement served its purpose well for the next 25 years but miserably failed in two issues - 1) It prevented gold from seeking its real market value; 2) It lacked provisions for checking the gold reserve growth. With world gold production lagging so precariously slow against actual demand, the situation ended up with the US Dollar being hugely overvalued against gold. The $35 per oz rate of gold became increasingly untenable. Because of the lagging production of gold, the price of gold in the open market in London was rising and as a result, rapid outflow of US gold ensued depleting the US gold reserves tremendously, and finally reducing it to a mere 22% of world gold reserve by 1991.

As early as 1968, US President Johnson enacted a series of measures to stem the continued outflow of US gold. Finally, in 1971, US President Nixon declared it will no longer honor the $35 per oz. discarding the Bretton Woods agreement permanently and opting for a floating rate system of determining currency values. This in effect reduced all world currency into becoming "fiat" currencies. ( A fiat is an authoritative pronouncement. A fiat currency is defined and created by a government. It is given meaning only by legal tender laws—national laws that say that the fiat currency has to be accepted as payment in that country, and thus force people to use the fiat currency.)

None of today's currencies is backed up by gold or anything tangible. They are all 'fiat' currencies. They are
merely created by legal tender laws that dictates that a currency must be accepted as payment in that country.  Worst, because currencies are not pegged against any tangible standards, governments can freely print them as they will. Printing new money against its borrowings has in fact become a common practice among governments today and has alarmingly increased since 1995. This has created a global bubble economy about to burst (if it hasn't yet). Meanwhile, the US Dollar's  role as a global reserve is now being questioned and challenged almost everywhere.

The chances of major nations reverting back to a gold standard has become a favorite topic of discussion among the academe and various financial circles worldwide. Developments favoring gold as money are spreading. Islamic nations are studying the possibility of a gold Dinar, the president of Argentina has proposed a gold-backed peso as an answer to its economic woes. Russia is proposing a convertible currency pegged against gold.

The price of gold reached a high of about $1016 per oz. in March of this year(2009) rising continously from a low of only around $260 per oz. in April 2001. It remained for the most part of this period below $500 per oz. mainly due to the efforts of central banks to keep the gold prices low to protect their own currencies by borrowing and lending gold among themselves as their form of market intervention. In 2007, the first signs of the bubble bursting came out, and in 2008 a crippling global recession finally took hold of the world with no solution yet in sight. Meanwhile, gold shone and showed its luster as a safe haven for capital during these troubled times rising above the $1000 per oz. for the first time. It is currently trading around the $920 per oz. level.

So, should we buy gold now?

The continuing financial deterioration in the US without a solution in site argues for a continued decline of the dollar. However, other countries are resisting the dollar's decline since they don't want their own currencies to appreciate at this point in time. We are therefore faced with a global currency debasement which will ultimately make the prices of tangibles like precious metals rise in value significantly. In short, gold is poised to still break new highs. But, the strongest argument favoring further gold price rises is the fact that world gold mine supply tremendously lag actual gold demand. for jewelry, industrial use, etc.

Buy gold on dips now! But, don't buy without consulting an Aurum Advisor. Convert your existing assets into gold before they get further depleted by the continuing deterioration of the US economy. Go for gold coins as they are tangibles and ownership isn't that difficult. Visit the website of one of my favorite Aurum Advisors - Gold Made Easy and you will find out that investing in gold is really that easy.

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  1. It's a nice metal to buy if you have extra cash

  2. Buying gold is not for everyone. Only those who can Buy Gold Assets are able to keep these valuables. Still, it's better to have gold assets because you can save them for a rainy day.