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Many of today’s younger investors have never lived during a period when major countries were on a gold standard. While no longer in existence, it is wise to understand and appreciate what the gold standard is and why it is no longer used.

The gold standard is a monetary system where the standard unit of the currency is based on a fixed amount of gold. This system has three basic forms: “gold specie”, “de facto” and “gold bullion”; each system uses a different form of implementation to fulfill the demands of the system.

Gold specie was the system used in Great Britain until World War I. This system uses currency that is either gold or coins of other materials that are guaranteed to be redeemable for gold at a fixed rate.

Different than gold specie, the de facto system was common among many countries whose currency was tied to the value of other countries on the gold standard. This was a common practice when the United States was on the gold standard and other countries assigned the value of their currency to the value of the dollar.

The final form is the gold bullion system. In this system, gold coins are not circulated, but can be purchased on demand at a fixed price, much like the gold specie system. The benefit of these systems is that gold provides a resource that adds stability to the currency.

The problem is that gold is scarce and using such a standard worldwide would grossly inflate the price of gold in order to make it match the worldwide currency that is in circulation. Twice in the history of the United States, economic hardships forced the government to confiscate gold, with the government buying back outstanding quantities to stabilize national reserves.

For investors, the repealing of the gold standard has largely been a benefit. Gold tends to track opposite of the US dollar and provides a valuable alternative during difficult economic times and a reliable alternative currency. Many people both profit from investing in gold and holding it as an emergency asset during difficult times.

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Stewart Lawson

Senior Staff Writer - Gold-Investment.info