The many qualities of gold, making it one of the most coveted metals in the world and a metal of choice in many areas including dentistry and medicine, electrical engineering, construction and aerospace . But another important use of gold is that it helps to stabilize the monetary systems.
Gold standard : a tool to stabilise and control debt.
For centuries, the most developed countries have been based on the gold standard, preventing governments to create unlimited amounts of money and to borrow heavily. Many incidents throughout history show the negative consequences when a country has eliminated the gold standard and adopted a fiat system.
The most notable example is that of John Law, head of the Central Bank of France in the eighteenth century. To try to reduce the debt of Louis XIV, Law began to print banknotes, and flooded the economy.
His plan worked – for some time. The bank notes quickly lost their value, the point of not argue any more than the paper they were printed. Law was forthwith exiled from France, whose economy sank further into crisis, paving the way for the revolution that took place later in the century.
While Law is an extreme example, but the case is instructive.
Why gold is the best investment in times of crisis ?
The gold standard limits the amount of debt that can be issued.
44 years ago, when the US switched to a fiat system, the federal government had $ 399 billion. Since then, the debt has ballooned to 4411%, reaching 18,000 billion – more than double the total of gold in the world (nearly 7000 billion). Such debt levels can be achieved only in a fiat money system, where money is easy, virtually unlimited and without any guarantee.
Since the abolition of the gold standard, governments continue to print more tickets, and thus contribute to dilute the money supply. Wealth is thus constantly transferred from your pocket, your bank account to the government and the banking system.
The reasons why gold is the best investment in times of crisis are manifold. Gold coins and gold bars are an easy medium of exchange because they can store a large amount of value in a very small amount of metal. Therefore, so it is understood that it is easily transportable.
Gold is the oldest unit of account. An ounce of gold has the same value in China, in Africa or the United States. It is for this reason that the price of gold is expressed in different currencies (EUR, USD, JPY, GBP …)
But the main reason making it the ideal investment in times of crisis is that it is limited in quantity. Governments can not create or print gold, as they do with money. This limited offer, from recycling gold jewelery and mining production are that gold retains its purchasing power.
Today, no country uses the gold standard. In 1999, Switzerland was the last to give it up. However, central banks around the world continue to maintain and even increase their gold reserves, including Switzerland. With 1040 tons of gold, it has the seventh largest reserve in the world, just after Russia.
Speaking of Russia, it was recently overtaken by China, which announced in July that it had increased its gold reserves by 57% over the past six years, more than 1658 tons. 600,000 additional ounces were purchased during the same month.
Why is China so? China wants to lean its currency, the renminbi, to participate in the basket of currencies of IMF special reserves, as well as the US dollar, the British pound, the euro and the yen.
Also, Texas is now establishing the very first gold deposit managed by a US state to compete with the Federal Reserve. In theory, this will allow Texas to be more financially independent and enjoy a better financial stability.