The overall economic conditions worsen and people are losing their trust in central banks. Recently, more and more experts have been questioning the sustainability of our monetary system. After the U.S. government has abandoned the gold standard in 1973, currencies are based on nothing else than a governmental guarantee.
However, as sovereign debt levels are increasing and the financial crisis has revealed the vulnerability of the global banking system, investors have become more critical.
Fiat currencies vs. commodity currencies – what’s the difference and why does it matter?
All leading currencies are fiat currencies. Basically, fiat currencies are not backed by any real value. It’s just printed paper. What make such a currency valuable is that the governments guarantees its value. Obviously, that does only work as long as the government has enough credibility to gain the trust of its people.
The opposite of a fiat currency is a commodity currency. That means the paper money we use is backed by an underlying value, such as a precious metal or anything that is stable over the long-term. Historically, governments used gold to back up their currencies, that was called the “gold standard.”
The advantage of a commodity currency is that it cannot be manipulated easily. If the US dollar was gold-backed, the central bank could not increase the amount of money in the economy without increasing its gold reserves. Therefore, hyperinflation would only occur if for example a war or a natural catastrophe drastically reduced the economic production.
On the other hand, the gold standard limited the government’s ability to react on changing economic circumstances. If the economic conditions worsen, the central bank would decrease interest rates to stimulate economic growth. That’s what central banks all around the world have been doing throughout the last years.
Governments will try to fight sovereign debt crisis with inflation; central banks are not the saver’s best friend
After the financial crisis in 2007/2008 the global economy has crashed and central banks have decreased interest rates and launched massive asset-purchase programs in order to flood the markets with cheap money.
That hasn’t changed yet. The European Central Bank (EZB) is buying government bonds every month and interest rates are close to zero. Japan has even introduced negative interest rates, that means you basically have to pay money to store your cash in the bank. The Fed has started to increase interest rates in December, but only slightly and they might be forced to reverse their course soon.
Why is all that happening? On the one hand, the global economy is still not doing well. Hence, governments want to stimulate economic growth with cheap money. On the other and, government debt in the major economies is sky-high.
That creates an incentive for governments to create inflation in the long run. Sure, that is a comfortable way for politicians to decrease government debt, but it also expropriates savers. As investors realize that the dollar is not safe anymore, elder people, business owners and in general people who try to secure their future want to find a safe investment vehicle for their retirement money.
Conclusion: Don’t rely on fiat currencies, buy real assets instead
Leading international gold dealers such as Global InterGold have pointed to the instability of fiat currencies and advice investors to invest part of their wealth in gold. Investors share that point of view. Safe-haven buying is the major reason why the gold price has been soaring recently. Gold has gained about 15 percent over the past six weeks.
In fact, gold is a proven crisis hedge. Prices remain stable in the long run and gold keeps investors safe from rising inflation. Moreover, it’s easier to protect gold from governmental expropriation compared to other real assets. Especially international gold dealers can offer their clients to store their investment in safe locations all around the globe.
Hence, if you are looking to hedge against the upcoming recession, consider an investment in gold. However, watch out. Only deal with certified gold dealers that offer the security you need to protect your wealth.