The History and Future of Gold as an Investment

The use and attraction of gold dates back to ancient civilizations. Flakes of gold have been found in Paleolithic caves dating back as far as 40,000 B.C. The first firm evidence we have of human interaction with gold occurred in ancient Egypt around 3,000 B.C. Gold played an important role in ancient Egyptian mythology and was prized by pharaohs and temple priests. It was so important, in fact, that the capstones on the Pyramids of Giza were made from solid gold. As much as the Egyptians loved gold, they never used it as a bartering tool. Instead, most Egyptians used agricultural products like barley as a de-facto form of money. The first known civilization to use gold as a form of currency was the Kingdom of Lydia, an ancient civilization centered in western Turkey.

Want to learn more? Contact GlidePath Wealth Management to talk to a retirement planner.

Gold as Money

Fast forward to 1792, when the United States Congress made a decision that would change the modern history of gold. Congress passed the Mint and Coinage Act. This Act established a fixed price of gold in terms of U.S. dollars. Gold and silver coins became legal tender in the United States, as did the Spanish Real (a silver coin of the Spanish Empire).

In 1900, the gold dollar was declared to be the standard unit of account in the United States and paper dollars were issued to represent the country’s gold reserves. Fiat (paper) money was backed by the gold standard.

US currencies were subsequently  debased  in 1971 when they were taken off of the gold standard and replaced by “In God We Trust.” We have ever since relied on the full faith and credit of the US government, but the recent debt crisis has given rise to concerns and has generated conversations about gold as money.  The world economy is running on the fumes of delusory borrowed money, playing an outlandish game that will not end well. We owe each other money that won’t be paid in today’s dollars. That’s why cryptocurrencies were invented. Fiat money only works if we all agree to honor it; otherwise, it’s just pieces of paper.

Gold and cryptocurrencies are under serious consideration as replacements for paper money. Some say there’s not enough gold in the world to fill this role, but Economist James Rickards estimates that gold could become the world currency standard, which would raise its price 650% to $10,000 per ounce from the current $1550 per ounce.

Mutual Funds Versus Exchange Traded Funds (ETFs)

The Future of Gold

The trajectory of recent gold prices might ultimately bring it to world currency standard status. According to Casey Research, there are 8 primary reasons that gold prices are increasing and will continue to increase, maybe even to $10,000 per ounce.

 8 reasons gold prices will continue to increase:

  1. Basel III Moves Gold Closer to Officially Being Money Again
  2. Central Banks Are Buying Record Amounts of Gold
  3. Oil for Gold – China’s Golden Alternative
  4. The Fed’s Dramatic Capitulation
  5. Takeover Frenzy in the Gold Mining Industry
  6. President Trump Is Pro-Gold
  7. Socialism Is on the Rise
  8. Gold-Backed Cryptos – A Monetary Revolution

Here’s a synopsis of the top 4 reasons

  1. The Bank for International Settlements (BIS) is located in Basel, Switzerland. It’s often referred to as “the bank of central banks.” Its members consist of 60 central banks. A 0% risk weight will apply to (i) cash owned and held at the bank or in transit, and (ii) gold bullion held at the bank
  2. Central banks bought 30 million ounces of gold, or $45 billion, establishing a 50-year record high.
  3.  China’s “Golden Alternative” allows oil producers to sell oil for gold and completely bypass any restrictions, regulations, or sanctions of the U.S. financial system. With China’s Golden Alternative, a lot of oil money is going to flow into yuan and gold instead of dollars and Treasuries. .CNBC estimates that the amount of redirected oil money will eventually hit $600-$800 billion. Much of this will flow into the gold market, which itself is only $170 billion.
  4. After nearly six years of 0% interest rates, the U.S. economy is hooked on the heroin of easy money. It can’t even tolerate a modest reduction in the Fed’s balance sheet and 2.5% interest rates, still far below historical averages. In other words, this monetary tightening cycle is over. The next move is a return to QE and 0%, and perhaps negative, interest rates. These moves would, of course, weaken the dollar and be good for gold. By flipping from tightening to signaling future easing, the Fed has turned a major headwind for the gold market into a tailwind.