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Gold in the Modern Financial System

Updated Sep 24 2023
7 Min
mr slava
Nick Patel
CEO & Founder at Clinq.Gold, Bank of Bullion | Keynote Speaker

Most states used to rely on the golden standard when issuing their national currencies, and the USA followed this rule until 1971 – the year when it stopped using its gold reserves to back the printed US dollars. 

The practice was dropped across the globe, separating gold prices from national currency dynamics. But does that mean gold has no place and significance in the modern economy? Absolutely not, as gold still plays many important roles in this field. 

Besides, the recent rush of central banks to increase their physical gold holdings suggests that gold’s perspectives are good. Let’s take a deeper dive into what gold does in economic terms and why having some is always a wise investment idea. 

Long-Term Investment Value 

Inflation is the worst enemy of any currency, and it’s unavoidable even for a stable reserve currency like USD. As inflation progresses, money loses its purchasing power, and households need more to buy things they used to afford. Here’s some simple math to illustrate how gold can help you address that erosion of your assets: 

  • In the 1970s, you could buy almost 3 ounces of gold for $100 (the price per ounce fluctuated around $35).
  • $100 was a good sum in that period; its purchasing power equals $791 today, which is also a good sum that can buy you much. 

Now let’s compare owning $100 and three ounces of gold for all these years – if you had that amount of gold in the 1970s and kept it until 2023, you would get $5,789 for that asset today. And if you didn’t buy those gold ounces, you would still have… $100 in your pocket. 

This simple exercise reveals the rise of gold prices together with the rising cost of living. This way, gold can aid its holders as an inflation hedge, helping people preserve the purchasing power of their financial belongings. 

Hedge Against the Weakening USD 

Again, if we look at the present-day inflation scenario, we’ll see that gold is a way out. Gold appreciates as the US dollar declines and the world faces fiercer inflation. Even if the worst predictions don’t come true, gold won’t fall that much in price because of its comparatively low volatility, thus shielding you in any case.

Politically Neutral and Safe 

Failing states, political turmoil, revolutions, wars… All these events pose huge risks for investors, even those living far away from the hotspots of geopolitical conflicts. However, gold is politically neutral and technically not tied to any national currency. Therefore, its value doesn’t depreciate with intensifying uncertainty or economic shocks. You can exchange gold for fiat money in any place in the world, losing nothing and enjoying the stable purchasing power of this asset at any moment in time. 

Dividends from Gold Assets 

Obviously, holding a gold bar in your deposit box won’t pay you dividends; the only guarantee you have is that the amount of gold will remain unchanged over time. However, people interested in gold investments can gain profits from gold stocks or investing in gold-mining companies. Any of these investment solutions can give a fair ROI over time, as the gold mining industry is relatively stable and high-yielding. It still comes with the volatility typical for securities. Still, the dividends of gold miners are often generous, offsetting those volatility risks and paying off in the long run. 

Gold Is Appealing and Safe 

That said, you can now see that gold is quickly regaining its investment appeal and significance. Many economic and geopolitical factors undermine people’s confidence in fiat currencies, including the USD, and make forward-looking investors search for more stable alternatives. The good news is that gold, a precious metal used since ancient times, can provide conservative stability and a safe haven for investors of all risk tolerance levels. Thus, it’s high time to consider gold investment as your new investment strategy in the fragile securities market.

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