Posting this from UBS on gold.
- Zimbabwe announced its latest attempt at a domestic currency: a gold-backed Zimbabwe dollar. Events like this excite “gold bugs”—Tolkienesque figures who believe gold is the only true currency to ever exist. This is a misunderstanding of history.
- Before the nineteenth century, gold was rarely used as an ordinary currency. Credit or “book money,” the fiat currency of its day, dominated ordinary transactions, and silver was the preferred precious metal. After a furious debate in the early nineteenth century, the UK declared a pound to be 113.0016 grains of gold. However, less than 2% of pounds in circulation were actually backed by gold.
- The idea behind a gold standard is that a currency becomes tied to a commodity with a stable value. The great problem with this is that gold does not have a stable value. Like any other commodity, its relative value goes up and down. For instance, in September 2022, US dollar milk prices were rising over 16%. In gold terms milk prices were rising over 23%—dangerously high inflation.
- Gold-backed currencies experience both inflation and deflation with volatile economic cycles, as demand for liquidity and the value of gold shift relative to other commodities swing about. A gold-backed currency is no guarantee of price or economic stability.
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Meanwhile, the price of gold has surged. Which means, even if you don’t like the UBS comments, they’re right on its not stable value:
This article was written by Eamonn Sheridan at www.forexlive.com.
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