Monday, October 12, 2009

Gold at $1,500? Don't hold your breath

A picture of a wallet.

Image via Wikipedia

By Garry White

However, unlike other commodities it has relatively few uses other than as an ornament. Copper is used in wiring, iron is used to manufacture steel but gold's main uses are – and always have been – as a store of value and as a way to demonstrate personal wealth. Even if solid gold bathroom taps are not to your taste, they certainly make a point.

This means that gold really should be considered as a currency – and nothing else. This brings us on to the subject of fiat money.

Fiat currencies are not backed by gold. When most currencies were on the gold standard, a unit of currency could be exchanged by central banks for a fixed weight of gold. That way, paper money could be used instead of using gold or silver coins.

Today's currencies are all fiat money. The £5 note is no longer backed by anything. It is legal tender and has a value because the government declares it as legal tender and will accept taxation payments on this particular bill of exchange. But, when push comes to shove, a £5 note is just a piece of paper with no intrinsic value at all. It certainly isn't worth £5.

Gold at $1,500? Don't hold your breath

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