History of Gold
Throughout human history gold has been prized, revered, worshipped, and otherwise valued for its beauty, rarity, unique density and other physical and intangible properties. It has been the sought after property of rulers and the elite, an historic component of religion, trade, and government; its intrinsic value is universal and timeless. First used as money around 560 BC, gold replaced barter to create the world’s first financial instrument.
Since that time, gold coins and bullion have been used for financial transactions throughout the world and have remained the most trusted and reliable form of currency of all time. Its first known use was in the Middle East where the first civilizations began. The oldest pieces of jewelry are found in the tombs of Egyptian rulers that date back to the third millennium BC. The use of gold in artwork was common in the Persian Empire, and Roman antiquities show its frequent use in household items, and furniture among the upper classes.
By the third century AD, Roman citizens wore necklaces that contained gold coins with the image of Caesar, and gold coinage in general was spreading across Europe. In the Americas, gold was in use long before the arrival of the Conquistadors, with degrees of craftsmanship employed by native artisans that far exceeded the Europeans. Wherever man travelled across the globe, gold was treasured in all forms.
During the frontier era of the American West, the discovery of gold at Sutter’s Mill brought thousands of settlers across the Great Plains, over the Rocky Mountains, to California and the Pacific Northwest. Elsewhere, gold rushes occurred in Australia, South Africa, and Canada throughout the 1800s.
In 1821, Great Britain was the first nation to adopt the Gold Standard. Meant to stabilize the global economy, it dictated that a nation limit its issued currency to the amount of gold it held in reserve. This worked so well that, by World War I, most countries were on the gold standard. Despite a few recessions, it worked pretty well until the costly war began. Between 1914 and 1919, most countries suspended the gold standard so they could print enough money to pay for their military involvement. Unfortunately, printing money created hyperinflation–so much money was printed tying their currency to a guaranteed value in gold. For that reason, most countries returned to a modified gold standard.
Once the Great Depression hit with full force, countries once again had to abandon the gold standard. When the stock market crashed in 1929, investors began trading in currencies and commodities. As the price of gold rose, people traded in their dollars for gold. It worsened when banks began failing. During this period, the Federal Reserve kept raising interest rates, trying to make dollars more valuable and to dissuade people from further depleting the U.S. gold reserves. These higher rates worsened the Depression by making the cost of doing business more expensive. Many companies went bankrupt, creating massive unemployment.
In 1933, at the height of the monetary and banking crisis of the Great Depression, President Franklin D. Roosevelt issued Executive Order 6102 which required all owners of gold coins to turn in all but five ounces of their coins to a Federal Reserve Bank in exchange for paper currency. As a result, only an estimated 1% of pre-1933 gold coins remain in existence today. This ban on the private ownership of gold lasted until 1974.
The outbreak of World War II ended the Depression, allowing countries to go back on the gold standard. Most countries adopted the Breton-Woods system which set the exchange value for all currencies in terms of gold. It obligated member countries to convert foreign official holdings of their currencies into gold at these par values. However, since the U.S. held most of the world’s gold many countries simply pegged the value of their currency to the dollar thus making the dollar the de facto world currency. Gold was set at $35 per ounce.
The Breton-Woods Agreement meant that central banks had to maintain fixed exchange rates between their currencies and the dollar. They did this by buying their own country’s currency in foreign exchange markets if their currency became too low relative to the dollar. If it became too high, they’d print more of their currency and sell it. Even though the dollar was still worth 1/35 of an ounce of gold, most countries no longer needed to exchange their currency for gold. The dollar had replaced it. As a result, the value of the dollar increased — even though its worth in gold remained the same.
The strong dollar led to inflation and a large balance of payments deficit in the U.S. which in turn helped to create stagflation. The U.S. started to deflate the dollar in terms of its value in gold to curb double digit inflation.
In 1971, gold was re-priced to $38 per ounce, then again to $42 per ounce in 1973. As the dollar devalued, it motivated people to sell their greenbacks for gold. Finally, in late 1973, the U.S. government decoupled the value of the dollar from gold altogether. The price of gold quickly shot up to $120 per ounce in the free market.
Once the gold standard was dropped, countries began printing more of their own currency. Inflation usually resulted, but for the most part abandoning the gold standard created more economic growth. However, gold has never lost its appeal as a currency of real value. Whenever Recession or Inflation looms, investors return to gold. By 2011, the price of gold was over $1,600 an ounce. It reached its record high of $1,895 on September 5, 2011.
Finally, gold, as a currency of real value, is a hard asset that you can hold in your hand, trade for goods and services, sell in a wide global market of dealers, jewelers, pawn shops, and other mercantile exchanges. It is not subject to the vagarious and uncertainties of Internet security, online brokerages, paper documentation, bank failures and the like. It provides a level of protection that no other asset can offer. Historically, it is the “go-to” currency of choice in times of war, natural disaster, financial melt-downs, political instability, and other calamitous events. It cannot be accidentally deleted, hacked, or destroyed by flood or fire, nor is it affected by capricious downgrades by ratings institutions, market gurus, or anything but global supply and demand. In this regard, no other asset provides the protection, reliability, and peace of mind that is afforded by gold as a tangible asset.