If you’ve never bought physical gold, silver, platinum or palladium before there are a number of reasons why you should consider doing this. In this article we answer the question…why own gold.
For many people buying precious metals doesn’t seem modern, and the rationale behind doing it unclear. In fact, that’s the way some people would like for you to see gold – as a historical relic not fit for modern use. As we soon shall see though, gold is actually a gauge of the effectiveness of the fiat monetary system.
It may be easy to think of our modern fiat currencies as “money” when in fact, they aren’t. They are basically IOU’s backed up by the government – a substitute for money. Gold on the other hand is money.
Gold has been around for ages as a monetary instrument. Coins containing gold appeared around 800 B.C. and the first pure gold coins were struck during the rein of King Croesus of Lydia about 300 years later.
Gold, and the other precious metals, display some unique characteristics, which makes them ideally suited as money.
Historically, many things have been used as money, but over time gold and silver have emerged as the best forms. The main reasons for this is that gold, predominantly, is durable, divisible, consistent, convenient, and have value in and of itself.
Let’s briefly examine each of these five reasons that originally were defined by Aristotle in the 4th century B.C.
Gold is durable because it won’t disintegrate if left in a bank vault or safety box. Other historical forms of money, such as bartering tools or food, do not display this characteristic.
Gold is also divisible as you are able to create both coins and bars from it. This is for example one of the characteristics not displayed by diamonds, which often is mentioned as a potential alternative type of money. You can’t divide a diamond without destroying the value of the whole.
Gold also displays consistency. Many other types of money don’t. Real estate would for example not function as money as each type of property will be different.
Gold is also convenient as its value is of such an extent that one doesn’t have to carry several kilos to carry a significant amount of purchasing power.
Finally, gold has a value in itself. An intrinsic value. It can’t go to zero.
These five points are the main reasons why gold has managed to survive throughout the ages as the best preserver of wealth. There are further advantages with gold as money as opposed to fiat currencies, such as the fact that gold can’t be conjured out of thin air and that gold is the only type of asset that at the same time isn’t someone else’s liability. It comes with zero counterparty risk. This is extremely valuable today as we are seeing increased instability in our modern banking system.
When it comes to fiat money the story is very different.
There is no fiat currency that has survived the test of time. All paper currencies eventually end up being worth their intrinsic value – which is zero.
A good modern example of this is the U.S. dollar. Ever since the gold standard was abandoned in the U.S. there has been a steep decline in the dollars value. Since 1774 the dollar has lost over 90% of its value, as illustrated by the graph below. Gold displays a remarkable stability in contrast to this – 1 ounce of gold owned back in 1774 would still be 1 ounce of gold owned today in 2013.
So why is it that governments dislike the increased importance of gold, and prefer a paper system?
This is a much longer discussion, but what it basically comes down to is this. With a paper money system it is much easier to increase debt to fuel spending and “dabble” in the economy to try to control economic cycles – something that has been proven time and time again as unsuccessful. The state is also able to tax individuals indirectly through inflation with a paper money system.
Nowadays, our monetary system is not even paper based. These days, it’s just electronic numbers. By the press of a button central bankers are able to conjure money out of thin air. This all works until the day that confidence in the currency or system is lost. Gold is the opposite of the fiat currencies. It’s been around for ages and has preserved wealth successfully over the years as paper currencies have come and gone.
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