How the Gold Standard Came About

Wikipedia defines gold standard to be “the monetary system where the standard economic entity is measured in terms of a specific weight in gold”. Hence, the Gold Standard unit of currency is usually defined in reference to the precious metal.

Past Standard

There was no formal gold standard in the past although the Sir Isaac Newton did make an evaluation of gold and silver using his invented measurement system in 1717. Hence, many take that this kicked start the Gold Standard that was to be established. But it was only in the 1870s that there was an official Gold Standard.

With the establishment of an official Gold Standard, many governments began adopting this official gold standard for trading currency notes amongst themselves. The users of the Gold Standard view the standard as a contrast to the expansion of debt and credit. It is not possible for any government to generate arbitrary funds that are backed by gold unlike the fiat currencies of today.

Gold Standard Opposition

With a Gold Standard, it is not possible to create an artificial inflation through currency devaluation. Hence, the monetary authority’s credit is constant; there is no ‘currency uncertainty’ with more lending encouraged.

However, not all countries adopted the Gold Standard of the day; they manipulated the paper currencies which led to debt crises and currency depressions where the central banks manipulated the currency until inflation comes on.

One example of this occurrence was the 1819 panic in U.S. when the country’s second National Bank turned more towards paper-based currencies with opposing movements against the Gold Standard that was politically motivated. Hence, the Gold Standard started to lose its grip over many industrial nations and the international market. It was decided that the Gold Standard was dropped as a consequence of its lack of support and functionality in most nations with the emergence of fiat currency.

It was only the private institutions that continued with the digital gold currency and used accounted gold in grams as money form.

Rise of the Dollar

The US was on a gold standard for the most part from 1795 to 1971. In 1933 we were taken off of the gold standard domestically, meaning citizens could not exchange dollars for gold but countries still could. Then in 1971 Nixon removed the US from the gold standard for good, thus causing inflation to begin to rise dramatically. Since then the dollar has lost over 80% of its purchasing power.

The Advancing Gold Futures

The significance of gold as a measuring standard of wealth and a viable investment option has been recognized since ancient times. Even after the dissolution of the Gold Standard worldwide, the yellow metal remains the most important asset for the various Central Banks across the globe. In such times, the demand surges in every quarter from national treasuries to retail investors. The recent global recession reestablished the authority of gold coins for hedging, investment, and even for speculative purposes.

The gold futures got a fresh impetus on June 15, 2010, amidst the growing concerns about the state of global economy. The August-delivery gold futures increased by 0.8% to reach $1,234.40 on the New York Mercantile Exchange, after hovering around $1,220 for a couple of days. Amidst concerns over the rising sovereign debt levels and weakening US Dollar, gold is increasingly seen as an effective alternative. The Dollar Index (DXY) was down by 0.7% to 85.93, while Euro ended approximately 1% higher than the Dollar. The Dollar Index measures the price of the US Dollar, relative to six major currencies of the world. The Greece-led economic crisis that came into picture in the first quarter of 2010 sent warning signals in the already ailing world economy. The impact of these events in the Euro Zone could not be assessed completely until date. As more and more grim news and analysis began pouring in, the fears of a double dip grew stronger.

The volatile situation in the European Union, in general, and the downgrading of Greece’s credit rating by Moody’s Investor Service on Tuesday, are the other major factors currently driving the gold prices. The credit rating agency slashed the ratings to non-investment grade, pointing out the inherent risks of IMF-sponsored proposed bailout packages for Greece. The Chicago-based Future Path Trading’s futures analyst, Frank Lesh stated that it is still uncertain whether the European Union is out of ‘danger’ and on the path of recovery. Nevertheless, the popular sentiments remain highly skewed in favor of gold. According to analyst Stephen Platt from Archer Financial Services in Chicago, following the past week’s price fluctuations, the commodity appears to be consolidating. Ever since the debt crisis became apparent, the commodity has become pricier by 12%. For the first time in almost four decades, since the gold futures were introduced on the New York Mercantile Exchange, the bullion touched $1,245.60.