Gold the New Global Currency

The unfixing of global currencies from gold is a fascinating story and one which, over the course of the 1900s, flew in the face of nearly every economic understanding up until then. After World War II, major nations around the world pegged their currencies’ values to the US Dollar, which was in turn backed by the precious metal. However, in 1971 Nixon removed that backing, causing the entire global currency system to collapse. It is now a free-for-all, with a currency’s strength measured by its nation’s relative economic strength in the world.

One of the short-term benefits of having currencies backed by nothing but global faith in the issuing governments is that if a government needs money for whatever reason – say, the financial sector is about to collapse or a constituent government is about to default – is that the central banks issuing them can just print more to cover the difference. They don’t even need to “print” it – they can just add billions of dollars, euros, yen or anything else to banks’ balance sheets, effectively creating it out of thin air.

This sort of behavior has consequences, however. When an exchange system is not physically backed, trust in the exchange system itself decreases and economic malaise results. The prices of food, gas and housing do not match their relative value if currencies are in constant flux. This is why many people believe that currencies around the world should return to a gold standard. The yellow metal is only special in that it has historical significance and in that there its existence is a relative constant. It can’t be conjured out of thin air, making its value trustworthy and, by extension, the values of everything it backs.

Many of the fast-rising BRIC nations are attempting to reduce their foreign holdings and conduct trade based on other standards. The dollar is losing power, the euro has little credibility, and even the yen is seen as somewhat undesirable. The currency vacuum leaves room for another form of exchange to arise, and while nothing is set in stone quite yet, it is important to note that the price of gold has risen alongside the prices of basic necessities.

In a gold-backed world, there would likely be no crisis fueled by rising prices, and traders would have a measure of stability not seen in the past forty years. As traders begin to realize this, we may find the impact of the precious metal to be stronger and stronger on global currency and trade agreements.

TRADERS: Practice trading the gold rate with a gold trading demo account.
Open Demo Account Here