In rough economic times, precious metals have been the way in which people of all different classes and backgrounds have protected their wealth. Whether as a hedge against inflation or against the total collapse of a currency, precious metals, and particularly gold, can act as safe havens for your hard-earned wealth.
Gold has traditionally been used both as a commodity for use in making jewelry, and more recently in medical and scientific instruments, but it has also been used throughout human history as a currency. The first documented use of gold bullion as a form of currency occurred in the 6th century B.C. in what is now modern-day Turkey. Ever since then, both governments and private companies have mined, refined, and minted gold in both coin and bar form. World currencies have traditionally been minted of gold, silver, and other fine metals, or else they have had their value pegged to the price of gold under a system called the gold standard. Up until 1971, the US dollar was kept pegged to the value of gold at $35 an ounce. President Nixon ended the gold standard when he removed the peg and allowed the dollar’s value to float freely, effectively converting it into fiat money.
Fiat money is defined as currency printed and declared legal tender by its government. It is not backed by a commodity such as gold, but merely by the promise of its government that the currency will act as an effective store of wealth and unit of exchange. Every country in the world now uses fiat currencies, many being pegged to the value of the free-floating US dollar. There is one great danger associated with the use of fiat money, however: that of inflation. When a government prints more of its currency, it reduces the value of that currency. Almost every currency in the world loses value every year in a process called inflation. Each year, the dollar has slightly less purchasing power than it did the year before. In a struggling economy, inflation is a serious danger, as governments are tempted to print vast amounts of money to solve their economic woes and repay their creditors. If this process continues unchecked, hyperinflation can occur: a situation in which the currency’s value falls to such an extent that it is rendered worthless. Post World War I Germany and Austria went through this politically and socially devastating process, as did Zimbabwe from 2006 to 2009.
To buy gold is an excellent way to shield your wealth from the ravages of inflation and hyperinflation. While the price of gold fluctuates in the short term, it has maintained a high purchasing power for thousands of years, and in situations of hyperinflation, those with gold bullion savings have been able to much more easily weather the storm and buy the essentials that the then-worthless fiat currency could not. While governments are able to print as much fiat money as they like, the amount of gold in the world is fixed, and thus, the value of gold has been stable in the long term. Investors looking to protect their wealth can now buy gold coins and ingots from both public and private mints, and by doing so they can create a hedge against financial disaster.