Historically, gold’s value has risen more consistently than paper currency. Why? Physical gold holds intrinsic value. It’s scarce unlike paper money and governments cannot create more gold like they can print paper currency — an event that often occurs during times of financial volatility and is happening now in the U.S.
Gold’s value rises because it is so scarce and nearly every other form of paper currency eventually becomes worthless.
History of Gold as Money
The use of gold and precious metals as a form of currency began in Egypt in 2500 B.C. The Egyptians used metal rings for trade. About 1800 years later, the Lydians began using metal coins, a tradition passed down to the Greeks, Romans and other Western peoples. These early gold coins were commodity money because they intrinsically held value. The Chinese then developed representative money, which, true to its name, represented value but had no intrinsic value itself.
Representative money can be traded for its value of gold, silver, or another agreed upon commodity such as tobacco or beans. Today, we use fiat currency, which is similar to representative money, except that it is not necessarily backed by the value of gold or other commodities. Because of this, governments, including the United States, can create as much or as little fiat money as they see fit to support their country’s economy.
Fiat currencies are government-created legal tender (e.g., the American dollar) and businesses and the public are required to accept them in trade for goods and services. The only real value of fiat money lies in the fact that people trust the government will continue to require businesses to accept the currency and to maintain good policy that keeps the value of the currency stable. Once a government stops considering a currency legal tender, it has virtually no value.
Governments can create more fiat currency without having more commodity to back the increase. This usually happens in times of economic volatility, such as during the recent economic crisis. Printing more money can cause inflation and ultimately decrease the value of the currency. Here in the U.S. the value of gold generally increases while the value of the U.S. dollar decreases.
Safe haven Gold
In these times of economic and political trouble, it is important to look back through history and review the value of gold against other currencies.
While fiat currencies tend to decrease in value, diminishing all you have worked hard to earn and save, physical gold generally moves in the opposite direction — increasing in value.
Gold and other precious metals are considered a safe haven against a decreasing dollar and increasing inflation, a way to protect financial portfolios and potentially earn value into the future.