What makes a good currency?
First off, it doesn’t have to have any intrinsic value. A currency only has value because we, as a society, decide that it does.
That’s the other secret of gold’s success as a currency – gold is unbelievably beautiful”
As we’ve seen, it also needs to be stable, portable and non-toxic. And it needs to be fairly rare – you might be surprised just how little gold there is in the world.
If you were to collect together every earring, every gold sovereign, the tiny traces gold in every computer chip, every pre-Columbian statuette, every wedding ring and melt it down, it’s guesstimated that you’d be left with just one 20-metre cube, or thereabouts.
But scarcity and stability aren’t the whole story. Gold has one other quality that makes it the stand-out contender for currency in the periodic table. Gold is… golden.
All the other metals in the periodic table are silvery-coloured except for copper – and as we’ve already seen, copper corrodes, turning green when exposed to moist air. That makes gold very distinctive.
“That’s the other secret of gold’s success as a currency,” says Sella. “Gold is unbelievably beautiful.”
But how come no-one actually uses gold as a currency any more?
The seminal moment came in 1973, when Richard Nixon decided to sever the US dollar’s tie to gold.
Since then, every major currency has been backed by no more than legal “fiat” – the law of the land says you must accept it as payment.
Nixon made his decision for the simple reason that the US was running out of the necessary gold to back all the dollars it had printed.
Find out more
In Elementary Business, BBC World Service’s Business Daily goes back to basics and examines key chemical elements – and asks what they mean for businesses and the global economy.
And here lies the problem with gold. Its supply bear no relation to the needs of the economy. The supply of gold depends on what can be mined.
In the 16th Century, the discovery of South America and its vast gold deposits led to an enormous fall in the value of gold – and therefore an enormous increase in the price of everything else.
Since then, the problem has typically been the opposite – the supply of gold has been too rigid. For example, many countries escaped the Great Depression in the 1930s by unhitching their currencies from the Gold Standard. Doing so freed them up to print more money and reflate their economies.
The demand for gold can vary wildly – and with a fixed supply, that can lead to equally wild swings in its price.
Most recently for example, the price has gone from $260 per troy ounce in 2001, to peak at $1,921.15 in September 2011, before falling back to $1,230 currently.
That is hardly the behavior of a stable store of value.
So, to paraphrase Churchill, out of all the elements, gold makes the worst possible currency.
Apart from all the others.
Learn more with The Gold Investor’s Handbook for Amazon.com
