Tuesday, October 2, 2012

The History of Money - Gold, the Raw Material



(courtesy of the British Museum, London)

This slide alludes to a couple of the important facets of gold that make it the most suitable metal to be used as money.

The Mining of Gold.

Gold is scarce. There is less than one ounce of gold per person on the planet.

It is more difficult to find sources of gold now. One hundred years ago, in the Yukon, for example, you used to find nuggets lying around on the ground. Now we need to dig deeper into the earth to find it, and that is more expensive. Peak gold is being mentioned more in gold mining circles.

In the world now there are around 130,000 tonnes of gold that has been mined. Most of this is still intact, although some has been lost through industrial usage.

It can take about 5 years and a large investment to get a new gold mine to production. It is estimated that there is around 60,000 tonnes underground in the known deposits.

For want of labouring the point, this is critical to understand what money is.

With gold being so scarce it means it cannot be easily mined to increase supply. Like paper money it cannot be created with the push of a computer's 'enter' button. This is why it will maintain your wealth.

Here again is the excerpt that I placed in this blog last Thursday describing why gold is used as money.

Why Gold

• Gold requires no government to prove it’s valuable. It has been the “Money of Kings” for thousands of years of human history.
• Gold retains buying power. Unlike fiat currency, Gold retains its ability to purchase goods over time.
• Gold can never go to zero. While “paper” relies on a government or financial institution to give it value, Gold has intrinsic value, and Gold has no counter-party risk. Regardless of what happens as financial institutions, financial systems, and even governments fail, Gold retains its value internationally.
• Gold is liquid and easily traded.
• Gold makes large amounts of wealth easily transportable, because it has a high value for its
weight.
• Gold has served as money because it is divisible; you can divide it into coins or re-melt it
into bars without destroying it or reducing its value.
• Gold is nearly impossible to counterfeit, as genuine Gold is easily recognizable.
• When measured by weight, Gold is easily countable and verifiable.
• Gold is not subject to decay, rot or rust.
• Gold is no one’s liability.
• Gold depends on no one’s promise to pay.
• Gold cannot be inflated (you can’t print more of it).
• Gold is scarce. There is less than one ounce of Gold per person on the planet.

Gold in New Zealand dollars: $2147.57 per oz
Previous all-time high: $2311.02 per oz (15 Nov, 2011)

Silver in New Zealand dollars: $41.88 per oz
Previous all-time high: $59.19 per oz (30 Apr, 2011)
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