Historical Evolution of Gold – Why it remains an option

For thousands of years, gold has been the best storage of value. Currently, people undervalue the precious metal, and central banks continue to print money. However, Jan Nieuwenhuijs, an analyst specialized in the gold market, believes that the yellow metal will perform better than stocks in the coming years.

Gold is the last-case storage for value, as it is the only financial asset acceptable worldwide with no counterparty risk. It has retained its purchasing power throughout history. In the long term, the stability of gold’s value is exceptional.

Because gold is scarce and immutable, it has been in use as money for thousands of years. The first use of the metal was for decoration: jewelry, gifts, and prestigious items. Already, in the fifth millennium BC, people manufactured gold beads of different sizes through series production in Varna, Bulgaria.

Around 3000 BC, the invention of weights and scales allowed accurate measurements of materials and improved trade. Gold developed as a storage of value, a unit of account, and a symbol of wealth. In 600 AC, coins were invented in Lydia, Asia Minor(present Turkey), promoting the metal’s use as a currency. Since then, gold was either officially money or was storage of value in many civilizations.

Since 1971, the world has been on a paper money standard. Banknotes are hardly in use today, due to the extensive use of credit cards. Whether paper or digital, money governments issue is what people commonly call “fiat money.”

Because fiat currencies can be created without limits, their value decreases over time, and therefore the price of gold denominated in fiat money increases.

In August 1971, when the last remnants of the gold standard were abandoned, the price of the metal was $41 per ounce. By the end of May 2020, gold’s price had reached $ 1,729 per ounce, an increase of more than 4,100%.

Although the price of gold does not rise in a straight line, it has always recovered. Over time, the cost of the precious metal has always offset the devaluation of fiat currencies. The purchasing power of gold has been remarkably stable in the long term.

Governments are aiming for stable prices for consumer goods. But, with the tempting power to print money, the prices of consumer goods rise, since printed currency loses value.

There is a great advantage to gold

Because the price of gold keeps up with the costs of consumer goods, it retains its purchasing power. Since 1800, the purchasing power of the metal in the United States has been remarkably stable. It became more volatile after 1971 but has followed a slightly upward trend.

Thus, while fiat currencies lose their value relative to consumer goods, gold has gained in value relative to consumer goods, and not just in the United States.

As mentioned, since 1971, the price of the metal has not risen in a straight line. Naturally, the question arises, “Is now a good time to buy gold?”

Nieuwenhuijs says that the price of gold will rise in the future. This year alone, the Federal Reserve has expanded its balance sheet from $4 billion to $7 billion. 

The data provided by the CPM Group shows that, in 1960, the yellow metal constituted 5% of all world financial assets. At the end of 2019, this percentage was 0.52%. 

Gold is the ultimate way to store value and provide protection against inflation caused by central banks’ reckless money printing. Currently, says the analyst, governments want inflation, because politically it is the easiest way to reduce the debt burden.