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MoneyGold - The gold standardGold is virtually indestructible. Almost all the gold ever mined (over 100,000 tons) remains in existence today. It is one of the rarest elements in the Earth's crust - 20 times rarer than silver and 15,000 times rarer than copper. Perhaps this helps to account for its enduring appeal and the mystique that tends to surround it. Central banks have always trusted in gold to the extent that they own over 35,000 tons of it, about 30% of the above ground stocks in the world. In the past, this level of gold was necessary to ensure the maintenance of the gold standard. The gold standard was essentially a monetary system where the currency is backed by gold, and allows currency holders to convert their currency into gold. The U.S. went off the gold standard in 1971. The full gold standard had three essential elements. First of all the government has to fix the price of gold to the currency. This price of gold in terms of the currency is known as the par value of gold. For example, 1oz of gold may be worth £4.50 equivalent in sterling. The second element is that the government must maintain the convertibility of gold. In other words, they must allow the public to convert their currency into gold. The ultimate situation would be 100% backing of the currency. This would mean that all paper money in the economy was backed by an equivalent amount of gold in the vaults of the government and central bank. However, 100% backing was rare as it required very large gold reserves. This means that there is automatic control over the money supply as the only way that the government could print more money would be if they bought gold back off the general public. The third and final element is convertibility of the currency with other currencies. People need to be able to convert their currency into others if they are to be able to trade internationally. The exchange rate will be given by the relative gold par values of the two currencies. For example, if 1oz of gold is worth £4.50 and is also worth $13.50, then the exchange rate would have to be £1 = $3. Read on to find out how the quality of the gold bars is ensured by the London Good Delivery List. |
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