A history of gold

For thousands of years gold and silver has been used as a form of currency.

It is a way for two people to exchange goods or services when one of them has nothing to trade. I could swap a bag of my carrots for two of your loaves but sometimes I want something that you have and I have nothing to exchange. That is why we need a means of exchanging something that has a relatively fixed value, something which has a value that you and I can easily agree on.

Gold, silver, salt, bones, oxen, livestock, even people (slaves) have all been used as a form of currency for as long as man has walked the planet.

These days, we think that in order to buy something we need either a rectangular piece of plastic or paper money – you know, the folding stuff, wonga, dough, notes – or 'cash' as we like to call it.

We all accept paper money as “having value” but it has no real value, it is merely a piece of paper with ink on it, and it is intrinsically worth significantly less than the value printed on the face. So why do we all accept it as currency, as something that has any value in the first place?

Well, there are three answers to that, all essential if any item is to be used for the purposes of exchange:

• It can be easily traded

• It can be easily carried

• It cannot be replicated

It is for the very same reasons that gold and silver were used as currency for thousands of years.

If I give you a gold coin in exchange for, say, a months work then you can trade that gold coin for food or rent, you can carry it around very easily, and you know that it has value because it is in short supply and that others will always recognise its value. It would only lose its value if we suddenly found a huge quantity of gold that was easy to mine and easy to turn into gold coins. The value therefore is in the rarity.

It is difficult to 'cheat' gold although many have tried. The most common trick was to shave a very small amount from the edge of a coin. Not enough that anyone would notice but if you did it enough times you could collect enough gold or silver to make it worth your while. That is why coins were minted with a series of dots just inside the outer edge so that you could tell if it had been shaved. Notice that the only reason this worked was because the gold or silver you shaved off was actually worth something. It could be melted down and sold – it had an intrinsic value.

Governments of the day also tried to make money out of thin air by making coins that had ever increasing amounts of cheap metal and ever decreasing amounts of gold or silver.

As a form of currency gold and silver worked extremely well for thousands of years.

The first gold coins were struck in Lydia around 700 B.C.

Consider this – in Roman times, an ounce of gold would have bought you a nice suit (well, toga I suppose). Here we are two thousand years later and an ounce of gold will still buy you a decent suit. Despite two and half thousand years of inflation gold has still kept its value.

The problem of moving gold around the country, or even between countries was solved by having a piece of paper, or note, that guaranteed you owned, say 40 ounces of gold and if you gave me that piece of paper, that note, that promised ownership then I now own 40 ounces of gold. The very first bankers were goldsmiths who would store gold on your behalf and charge you for the privilege. It was their notes, or promises of ownership, that became a kind of currency and avoided the hassle of moving the real stuff from one place to another. And so paper money was born.

Of course it is important to realise that for every note that promised there was 40 ounces of gold stored on your behalf, there WAS 40 ounces of gold stored on your behalf.

So what happened?

Well the first thing that happened was that bankers realised that the chances of everyone wanting their gold all at the same time was pretty slim so they could afford to print more notes than there was gold in the safe – and so it began. Paper money with nothing to support it. Provided there was never a run on the bank – the show could go on.

When the idea of paper money was first introduced as a means of currency there was some concern that it had no real value, that you could print as much of it as you like and that it was easy to fake. These were, and still are, real concerns.

The issue of forgery was solved, in part at least, by making it very difficult to copy and by changing the design on a regular basis. To some extent this has been reasonably successful but there are still huge quantities of forged notes in existence even today. Hence the constant changes to design to flush these out of the system and stop more of the same getting into circulation.

The bigger issue was the fact that whoever owns the printing presses, (that'll be the government then) could print as much money as they liked, whenever they liked. To prevent such a terrible thing happening there was an agreement that paper currencies would always be supported by a large amount of gold sitting in the vaults somewhere to secure the value of the notes (which clearly said - “I promise to pay the bearer”).

This worked for a while, but by the end of the second world war most of Europe was bankrupt and the only country with any money was America. The Americans decided that the dollar would become the reserve currency for the world and since no one else had any money, or any better ideas, it came to pass – but still supported by gold stashed in the bowels of Fort Knox. The deal was, if you want to exchange your dollars for gold, no problem. Just rock up in your armoured vehicles with sufficient soldiers to protect your stash and the good old US of A would exchange your dollars (worthless paper money) for gold. And the value was set at $35 per ounce.

What could possibly go wrong?

Well, governments being what they are, found that this pesky gold was getting in the way of their spending plans. Every time they wanted to print money they needed to have a stash of gold somewhere to support it – and they didn't.

So, on August 15th 1971, President Nixon closed the 'Gold Window”. This date should be taught to all children at school. It is the date that money became worthless and inflation became the ultimate tax. From now on, all a government had to do to reduce its own debt and devalue the money you had made was to simply print some more. This is what inflation really is – an increase in the money supply which results in higher prices. Higher prices are the consequence of inflation. So when a politician tells you he is controlling inflation – spit in his eye (twice, once for me).

So from 1971 you couldn't swap your dollars for gold but don't worry, the Americans promised to never undermine the value of the dollar by printing too many dollars (remember, they are the only ones with the printing presses) so the rest of us need not worry our little heads.

And why would we worry. America was, after all, the richest nation on the planet Earth. It wasn't just a superpower it was THE Superpower. It was the police force for the world. If we couldn't trust the American Government then who could we trust?

With the dollar as the reserve currency, other countries had often 'pegged' their currency to the dollar. With the link between the dollar and gold removed, ALL currencies would now 'float' against each other and the financial system we now know was born. The whole thing is a massive experiment – it is not how it has always been.

Then the Americans started spending.

Big time. Wars cost a lot of money. And whilst the idea of having a global economy sounds great, in reality, globalisation suited China and India much better than it suited the bloated, high salaried and expensive West.

The money poured out.

America went from having the most money - to having the most debt.

The printing presses churned. Promises were forgotten. Who needs gold when you have a printing press. Gold must be discredited. Who would want gold when you can have our nice fresh off the press dollars.

Other countries were joining in. Why did Gordon Brown sell 400 tonnes of British gold in 1999? Was it to discredit gold? Was it to raise cash? We do not know, but we do know it has cost the Treasury billions. Well, actually it has cost us billions because it was our money.

Skip forward to 2008.

The printing presses are running 24 hours a day all around the world. The result is that currencies are being devalued by the minute. You cannot pump money into the system at the current rate (average 15% a year) and not devalue a currency.

People have noticed. Back in 1999 when Brown was selling Britain's gold at bargain basement prices, someone was slowly buying it up. After 20 years of government abuse gold was starting to regain the shine it had enjoyed for over 2,000 years and the price started to rise. Back in 2000 it was worth $275. As I write this, gold is nudging $1,000.

This has been described as an all-time high, but it is a nominal high. For gold to achieve a genuine after-inflation high it will have to pass $2,500 dollars.

I, and others, believe it will.

I used to believe that gold was the only way to protect your wealth, but now I believe it is a way of making you rich.

The above is a light hearted review of a serious and sinister matter. I have not gone into great detail here but if you have any doubt as to a politician's fear of gold you need look no further than 1933 when President Roosevelt made it illegal for US citizens or US banks to hold gold in any form – not even certificates for gold for that matter. Today there are endless stories relating to government manipulation of the gold price. Conspiracy theories abound including how much gold there really is in Fort Knox these days.

I don't know the answers but ~ I do know that after 20 years, gold is out of the wilderness and back in the public eye.

The story continues and you are part of it – whether you want to be or not.