History of Gold Bullion

Human evolution throughout time has transported our living standards from cave men to the modern society comforts we enjoy today. As a species we also pride ourselves on the notion that we learn from the mistakes of previous generations. However when it comes to gold, history has shown that there has been very little evolution over time largely caused by the fact that human behaviour is built primarily on fear and greed. As such, no matter how much the previous generation learns from past mistakes, the younger generation always think that this time it will be different believing that they are more sophisticated than the predecessors and as such lessons are not enacted upon.

Gold has always been used as a currency of trade or the backing for currencies around the globe. This backing of currency, in simple terms, is referred to as the gold standard and allows a local paper currency to be exchanged for a fixed quota of gold. This gold standard allowed the citizens to trade using paper money (currencies) rather than having to carry around large quantities of gold as well as created stability to the local currency, generally low inflation and stable purchasing power of goods and services. Whilst the gold standard has been questioned, removed and reintroduced throughout time, the outcomes from this human behaviour has always been the same. For example, in history we have witnessed leaders of countries all over the globe remove this gold backing only to create a devaluing currency, growing inflation and the depreciating purchasing power of the local currency. The effect of this however directly impacts how much goods or services the local population can purchase with their paper money. When the purchasing power becomes worthless, history has demonstrated in a number of instances that local populations end up reverting back to either gold/silver or barter as tenders of trade in an effort to restore order. Additionally, each time the gold standard was removed, the chaos it creates to the economy proves difficult to restore back to the status quo of low inflation, stable currency and low interest rates.

As such, it takes a very strong political leader to take on this task of reintroducing the gold standard. For example Julius Caesar returned Rome's currency to stability via the gold standard, Napoleon returned France's currency to a gold standard and later became the emperor, Lenin returned the hyperinflationary Russia to the gold standard to stabilise the economy and statues of him were erected throughout the land. Similarly, Mao Tse-tung returned China to the gold standard and the country rallied around him. In 1949 the US Government also assisted Japan in correcting their hyperinflationary yen to the gold standard to create stability. The worlds strongest economy of the US, has also not been immune from this behaviour either showing three significant times in history where they removed the gold standard only to suffer devaluation of currencies resulting in a significant rise in inflation and, in some cases, hyperinflation.

The most notable time was when the US first created a currency they likened to "confetti" which was issued by the government but shortly collapsed. It was not until they again linked the US currency to the gold standard that it grew in acceptance around the world. In another example, 1973 saw the US currency disintegrate and the currencies in fact around the globe were floated. The US Carter administration lead the world into inflation whereby for the first time since 1934 (when the dollar was worth 1/35 ounce of gold), the dollar devalued to represent a purchasing power of only 1/850 ounce! Needless to say this had a dramatic effect on what the local population could exchange for goods and services. The basic benefits of the gold standard were even encountered in the 14th century when a Chinese historian quoted as saying: Paper should never be money (but) only employed as a representative sign of value existing in metals or produce just unfortunate that we continue to not learn from the lessons of the past.

The only benefit of high inflation periods or hyperinflation periods is that it makes it very easy to repay debt quickly. For example, when the local government removes the gold standards and starts printing huge quantities of money, it creates devaluation whereby the cost to buy goods and services appears to increase steadily. Germany experienced this when the rest of the world was reverting back to the gold standard and they started to print large quantities of money. At the start of the process in 1918 the German mark was valued at 8 marks to the US dollar (which had been repegged back to the gold standard). By 1921 the mark fell to 184 per US dollar, and in 1922 the mark fell again to 7,350 per US dollar, and finally in November 1923 the mark fell to a staggering 4.2 trillion per US dollar.

At the end of the cycle the local population were reduced back to barter as the backing of the gold to the currency was no longer present. Essentially if you are buying a loaf of bread for 4.2 trillion marks and your mortgage was set back in 1918 at $200,000 marks it would have been very easy to repay the debt once the currency has significantly devalued.

Today, the beauty of a gold bullion lies in its long-term growth potential and its ability to diversify investments, protect wealth and preserve one's purchasing power in times of economic uncertainty. In recent times, the past 5 years have seen us all experience strong equity markets, low interest rates and low inflation. However, the investment horizon is now changing significantly, with rising pressure on inflation, rising commodity prices and uncertainty in equity markets. Nothing has shown this more than the US Federal Reserves recent printing of huge sums of paper money and injections of liquidity.

Additionally, with the majority of the currencies around the globe no longer being backed by the gold standard, and the early warning signs of inflation that have echoed throughout history are looking like they might repeat themselves again. It is in times such as this, that the importance of gold and silver as an investment component in your portfolio becomes critical to allow you to capture the long-term growth projection of gold in the future. For more information please click on research report.