HomeBusinessU.S. Money Reserve Explains How Gold Became a Coveted Asset and Form...

U.S. Money Reserve Explains How Gold Became a Coveted Asset and Form of Currency

For thousands of years, gold has been used in jewelry, to make decorative items, and in other applications — including as a form of payment for goods and services.

The interest in gold, according to the U.S.-based National Mining Association (NMA), can be traced back to its early use in ornamental objects around 4000 B.C. The precious metal’s utilization in jewelry reportedly became popular around 3000 B.C. in southern Iraq and later in Egypt.

Gold’s use as currency, the NMA says, dates back to about 1500 B.C., when the 11.3-gram gold shekel coin became a unit of measure in the Middle East and the precious metal became the common medium of exchange in international trade.

Numerous countries have used gold as a form of currency since that time. China, for example, put small squares of gold into use in 1091 B.C.; the Roman aureus coin was issued in 50 B.C.; and Great Britain debuted its first significant gold coin, the florin, in A.D. 1284.

Gold Gains Ground as a Currency Around the World

By the late 19th century, a number of major currencies had, at some point, been tied to gold at a set per-ounce price, according to the World Gold Council, and for approximately 100 years, that general structure remained in effect.

The United States was no exception. For years, the country operated under what’s referred to as “the gold standard,” a monetary system which, according to Britannica, involves a fixed quantity of gold serving as a standard unit of currency or the standard currency unit being maintained at the value of a fixed gold quantity. The gold standard allows a nation’s currency to easily be converted to gold both domestically and in other countries.

Paper-based currency rose in popularity in the United States after Colonial notes were produced beginning in 1690 and was, for years, backed by precious metals such as gold and silver.

As U.S. Money Reserve notes in its “What Is Bretton Woods?” article, in 1944, delegates from 44 nations met in New Hampshire to establish a new international monetary system they hoped would stabilize exchange rates, curb competitive devaluations, and foster economic expansion after World War II.

The meeting led to a global fixed currency convertibility structure in which the U.S. dollar was tied to gold at $35 per ounce.

The dollar essentially became the world’s dominant reserve currency, with other global currencies possessing fixed yet adjustable exchange rates to the dollar.

The Fixed Exchange Rate System Falters

By the 1960s, issues with the Bretton Woods system had arisen: According to the Federal Reserve, the global supply of gold couldn’t meet the demand for international reserves, making gold-dependent exchange rates’ use challenging.

The United States had been running a continued payment deficit balance, promising to redeem dollars for gold at $35 per ounce. When the amount of outstanding dollar claims began to outpace the government’s stock of gold, concerns arose that if the U.S. potentially couldn’t honor its pledge to convert dollars to gold at the set price, the dollar might be at risk of being devalued, which highlighted concerns regarding the system’s longevity.

Rising inflation in the United States added stress to the financial system. By mid-1971, investors were transferring funds from dollars to foreign currencies, and central banks enthusiastically converted U.S. dollars into gold.

When then-president Richard Nixon stopped allowing foreign banks to exchange dollars for U.S. Treasury gold in August 1971, a number of foreign currencies began to appreciate against the dollar.

In December of that year, representatives from some of the world’s most developed countries met at the Smithsonian Institution in Washington, D.C., to determine a solution for the collapsing international fixed exchange rate system.

The outcome, known as the Smithsonian Agreement, involved the United States agreeing to devalue the dollar against gold by roughly 8.5%. Some other nations said they’d revalue their currencies relative to the dollar — resulting in an approximately 10.7% average devaluation of the dollar against the other currencies.

The Smithsonian Agreement, however, was short-lived. Speculators, according to the Federal Reserve, drove a number of European currencies to the top of their exchange-rate ranges; in response, their central banks gathered hefty amounts of unwanted dollars, adding inflationary pressure, and some countries increased the restraints they’d placed on financial exchanges.

Amidst the uncertainty, gold prices rose to about $60 per ounce in mid-1972. By early 1973, they had hit $90 per ounce.

By the time the United States eventually devalued the dollar by an extra 10% in February 1973, bringing gold to $42 per ounce, speculation against the dollar rose. The majority of major currencies were, within a month, floating against the dollar, signifying the end of the international fixed exchange rate system.

The Current State of U.S. Currency

Today, the United States and many other countries operate on a fiat money system. Fiat currencies, according to U.S. Money Reserve, can be defined as legal tender that is not backed by gold but is issued by a national government.

Instead of gold, notes that Federal Reserve banks hold today are supported by assets such as U.S. Treasuries, federal agencies, and government-sponsored enterprise securities.

Gold, meanwhile, has remained an in-demand asset on a global scale.

Central banks, for instance, have increasingly expressed an interest in amassing the precious metal in recent years. These banks began purchasing substantial amounts of gold in 2009, according to the Official Monetary and Financial Institutions Forum, and by early 2019, precious metals totaled roughly 10% of all central bank foreign exchange assets.

In 2022, central banks’ gold purchasing reached its highest level since 1950 — ultimately totaling 152% more gold than banks had bought in 2021, according to the World Gold Council.

Because a number of purchasers, including central banks, tend to hold on to gold instead of frequently trading it like stocks or other commodities to capitalize on short-term price movements, gold tends to provide an anchoring, stabilizing influence in a portfolio, according to U.S. Money Reserve President Philip N. Diehl, who served as the 35th director of the U.S. Mint.

“Physical gold is traditionally a buy-and-hold asset,” Diehl says. “Often, it performs well during periods of strong economies. It’s [also] really a standout asset during recessions and periods of political instability. For that reason, gold is often used as wealth insurance to offset losses in other parts of a portfolio during hard times, when gold prices are stable or tend to go up.”

Incorporating physical precious metals like gold into your portfolio can be safe, easy, and secure.

To find out more about what the process involves, call 1-888-356-7074 to speak to a dedicated U.S.-based U.S. Money Reserve Account Executive who can discuss your portfolio goals with you, offer information about U.S. Money Reserve’s available inventory, and help you make a precious metals purchase.


Most Popular