For thousands of years gold is the ultimate store of value. Currently, gold is undervalued as there are massive bubbles in asset markets and central banks continue to print money, which supports these bubbles. This is an unsustainable situation; and when the bubbles burst the gold price will rise.
Gold is the ultimate store of value, as it’s the only globally accepted financial asset without counterparty risk, and it has preserved its purchasing power throughout history. In the long-term, the stability of gold’s value is unparalleled.
Because gold is scarce and immutable, it has been used as money for thousands of years. Gold’s first use was for adornments — jewelry, regalia, and prestige goods. As early as the 5th millennium BC gold beads of different sizes and purities were manufactured through serial production in Varna, Bulgaria. The semi-finished products were worn in a necklace, and possibly traded.
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| Gold beads from Varna, Bulgaria, 5th millennium BC. Courtesy Leusch, V., Pernicka, E, and Armbruster, B. 2014. Chalcolithic gold from Varna – Provenance, circulation, processing, and function. |
Around 3000 BC weights and scales were invented, which allowed precise measurement of materials and enhanced trade. Gold developed as a store of value, unit of account, and symbol of wealth. By 600 BC coinage was invented in Lydia, what is now Turkey, which promoted gold to be used as a currency. In many civilizations ever since gold was either officially money, or used as a store of value.
Since 1971, the World has been on a pure “paper money” standard despite the fact that bank notes are hardly used nowadays. Most of the time, what is used as money are digital book entries. Whether in paper or digital form, money issued by governments is commonly referred to as fiat money.
The Price of Gold Goes Up
Because fiat currencies can be created boundlessly, over time their value declines, and thus the price of gold denominated in fiat money goes up.
In August 1971 — when the last remnants of the gold standard were abandoned — the gold price was $41 U.S. dollars per troy ounce. At the end of May 2020, the gold price had reached $1,729 dollars per ounce, an increase of more than 4,100%.
Although, the gold price doesn’t go up in a straight line, it has always “caught up.” Over time, the price of gold has always compensated for devaluing fiat currencies. Gold’s purchasing power has remained markedly stable in the long run.
Gold Preserves its Purchasing Power
Governments aim for stable prices of consumer goods. But with the seductive ability to “print” money, they always create too much. The printed currency loses value, and prices of consumer goods go up.
Because the gold price keeps up with prices of consumer goods, gold preserves its purchasing power. Since 1800, gold’s purchasing power in the U.S. has been remarkably stable. It became more volatile after 1971, but has kept trending slightly upwards.
This is the power of gold: it preserves personal as well as generational wealth.
Source: Jan Nieuwenhuijs | Voima Gold
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