Why do we all love gold?

Those of us who keenly read the financial media will be aware there has been a lot of chat in recent months about the BRICS countries launching a new currency in an attempt to rival the dollar as the world’s reserve currency. Whilst this is not a surprising story, one element contained within the reporting ended up leading me down my most recent economic rabbit hole. That detail being the fact that any new currency developed may be backed by physical gold, returning part of the world to a gold-standard. A gold-standard refers to a monetary system where paper money can be taken to a bank and exchanged for physical gold. This will sound alien to us in the 21st century, but this was the dominant monetary system in the UK and indeed most of the world for over 200 years, only coming to an end in 1931 as a result of mounting pressures brought on by the First World War and subsequent Great Depression. To dive into this issue, I read James Rickards ‘The Case for Gold’, a book gifted to me by my Godfather. Over 160 pages, Rickards puts forward the case for two things, a global return to the gold-standard, and the personal accumulation of gold. The main takeaway I received from the book is just how perfect gold is as a form of currency – not only did it solve problems for our predecessors, but it may very well solve problems for us today. When we think of gold today, we generally think about it in two contexts, the first being as something flashy to be worn on one’s wrist, neck or ears and the second is as a commodity that can be bought or sold, not too dissimilar to coffee, sugar or any other metal. The thought of gold as a form of currency has long since been diminished but that is perhaps its biggest achievement - it solved the problems of bartering for our predecessors.

Long before the days of Apple Pay, humans used to barter with one another and exchange goods for mutual benefit. To illustrate this, I’ve used an example. You are a baker, and I knit socks. We meet up the village square, I am hungry, and you have cold feet, so we exchange a pair of socks for a loaf of bread, and everyone is happy. This system is greatly flawed however, what happens if I turn up for my loaf of bread, but you don’t need any socks that day? What happens if we meet, but your oven is broken, and you cannot supply the goods that day? To solve this issue, you need a third-party good which we not only both see as valuable, but which is also not going to go stale like your bread or get ripped like my socks – you need money. Over the years humans have used numerous goods to fill this gap from alcohol and tobacco to seashells and, I am not joking, giant discs of limestone.

Gold stands above all in this respect, it is rare enough to be valuable but plentiful enough to serve as a currency, it is easy to transport, not toxic to handle (it can even be eaten), it does not rust, it cannot be burnt or cut like paper money, and it is malleable (can be made into any shape or size when melted). Gold today is the exact same as it was 100 years ago and it will remain that way for another 100 years – number 79 on the periodic table.

Ok, so that explains why our ancestors loved gold so much, but why would the BRICS countries be looking to re-impose a gold-standard in 2023? Here, there are two answers – durability and sustainability.

Just as gold’s durability solved our problems years ago, it also provides solutions in the modern world, chief among these are the risks of hacking and cyberwarfare. With everything going digital nowadays, money has been reduced to figures on a mobile banking app. Whilst this is incredibly convenient, it also means your life savings can be completely wiped out if your bank was hacked, having a gold-backed currency allows you to protect against this somewhat.

The second benefit is sustainability. Since the world turned its back on the gold-standard, governments and central banks have continually inflated their way out of trouble by printing money. As long as everyone accepts that this system is sustainable, there are no problems and these institutions can print away to fund projects and reduce debts, but if confidence is lost then the system collapses. Having a gold-backed currency would negate this issue as governments cannot simply pull more gold out of the ground to create the room they need; the supply is stable. Only time will tell if the BRICS do indeed adopt this approach. Anyway, I am off to the local refinery to get myself some gold.