Lear Capital Explains What Caused Gold To Be Viewed as a Valuable Asset — and How It’s Been Perceived Over Time Key Takeaways:-
For centuries, gold has possessed an enduring value. With Great Britain’s introduction of the florin, its first major gold coin, in A.D. 1284, civilizations continued to increasingly embrace the metal’s status as a monetary system in subsequent centuries. Around 1500 B.C., gold became the standard medium of exchange for international trade. The U.S. government stopped letting paper notes be redeemed for it in 1934. Paper notes haven’t been exchanged for silver since the 1960s. Where the dollar’s value became heavily dependent on the confidence the world has in the U.S. leadership and the country’s ability to remain economically viable. Kevin DeMeritt believes that paper money, with no fixed supply, is probably going to continue to fall — and the price of gold is probably going to continue to increase. For centuries, gold has possessed an enduring value, says Kevin DeMeritt, founder and chairman of Los Angeles-based precious metals firm Lear Capital. The U.S.-based National Mining Association trade organization suggests gold’s value was established through its use in decorative objects that date back to 4000 B.C .
The metal’s utilization in jewelry likely took off around 3000 B.C. within the Sumer civilization in southern Iraq — followed by its use in Egypt, where jewelry was later found in the tomb of the Egyptian king Djer.
The NMA says that around 1500 B.C., it became the standard medium of exchange for international trade as the 11.3-gram shekel coin became a unit of measure in the Middle East. From China’s use of small squares as money in 1091 B.C. to the Roman aureus coin issued in 50 B.C.
With Great Britain’s introduction of the florin, its first major gold coin, in A.D. 1284, civilizations continued to increasingly embrace the metal’s status as a monetary system in subsequent centuries. Several major currencies, according to the World Gold Council, had become tied to gold at a set price per ounce by the late 19th century — a system that essentially remained the status quo for roughly 100 years.
In 1944, prompted by a desire for enhanced stability after World War II’s end, the structure for a new international fixed medium of exchange convertibility system was established at the Bretton Woods Conference. A meeting of delegates from 44 nations was held in New Hampshire, to replace the standard that had been in existence.
The U.S. dollar, fixed to gold at $35 an ounce, became the world’s dominant reserve currency; other currencies around the world had fixed, yet adjustable, exchange rates to the dollar.
Do You Know? It is estimated that the world’s oceans are home to about 20 million tons of gold.
America’s Gold Approach While paper currency became a favorite in the U.S. after Colonial notes began being produced in 1690, for years, paper money was backed by precious metals like it. However, the U.S. government stopped letting paper notes be redeemed for it in 1934. Paper notes haven’t been exchanged for silver since the 1960s.
The collapse of the Bretton Woods system and the Smithsonian Agreement global exchange rate structure that had been negotiated afterward in 1971 led to the U.S. operating under a fiat money system. Where the dollar’s value became heavily dependent on the confidence the world has in the U.S. leadership and the country’s ability to remain economically viable.
The notes Federal Reserve banks hold today are linked to collateral such as the U.S. Treasury, federal agencies, and government-sponsored enterprise securities .
Without having to back currency with precious metal reserves, the government can print money at will — and has created trillions, Kevin DeMeritt says.
“Before 1974 in the United States, we had to back a printed paper dollar with gold or silver; we don’t do that anymore,” he says. “[With] every dollar you print, the money that’s already out there becomes worthless and less; that’s what happens over time to paper notes.”
It, though, hasn’t become any less rare a resource. Due in part to its relative physical scarcity, the resource has remained in demand.
“Fiat currency is a relatively new concept,” Rachel Mills, author of the Lear Capital report “The Tipping Point ,” said in a statement when the report was released in September. “On the other hand, precious metals have had a captious role as the medium of exchange and finance for 8,000 years.”
While some investors had shown significant interest in U.S. Treasuries in the past, more recently, some have shifted their focus to gold — including central banks, whose purchasing hit the highest level since 1950 last year.
“Central banks entered the market in 2022,” Kevin DeMeritt says. “They purchased a quarter of all the mining supply, which is just absolutely a huge jump from where they were purchasing. They’ve continued to buy into 2023. It makes sense; they get to hold it, and that’s going to offset some inflation pressure.”
Both China and Russia have shed securities in recent years instead of this metal. Previously one of the largest foreign holders of U.S. Treasuries , China’s total, for instance, fell by more than $50 billion in the past year and has decreased by nearly $300 billion since early 2021, according to Axios.
In a recent appearance on the redacted news show that was shared on Lear Capital’s YouTube channel , Kevin DeMeritt discussed countries discarding large amounts of U.S. Treasures with host and former Fox News anchor Clayton Morris, who called U.S. Treasures “the fuel for the American government.”
Kevin DeMeritt said central banks’ recent purchasing habits indicate “a huge shift from selling precious metals 10 years ago to accumulating them now.”
What the Future Could Hold for Gold (This graph shows the average gold price worldwide from 2014 to 2022 with a forecast to 2024, in US$ per troy ounce).
Americans would feel the effect, Kevin DeMeritt says, if the world transitioned away from considering the U.S. dollar to be the reserve currency.
“People in the United States would have a gigantic wake-up call because things would become much, much more volatile,” he says. “[Then] it’s denominated in somebody else’s currency. [When] that monetary system goes up and down, we would pay higher product prices.”
While the U.S. losing its reserve currency status doesn’t seem to be an immediate threat just yet, the sustained interest in gold can be a takeaway for investors, according to Kevin DeMeritt.
“People moved to paper notes,” the Lear Capital founder says. “Now they’re moving to a digital monetary system — and what are the central banks holding? Gold.”
Banks, DeMeritt says, are replacing U.S. Treasures with gold for a reason.
“They understand paper and digital [currencies] could potentially go away,” he says. “In the past, we’ve had hundreds of mediums of exchange collapse or go away. They need something physical and worth it. You can only mine so much gold per year.
If you put an increased demand on a fixed supply, the price typically goes up. Paper money, with no fixed supply, is probably going to continue to fall — and the price of gold is probably going to continue to increase.”
Also Read: 5 Reasons Why Investing in Gold is a Smart Choice
