The gold standard is back
It has been almost 90 years since the Bank of England removed the pound’s peg to gold. This was a system where gold would be exchanged for pounds at a fixed rate, making the currency worth a reliable amount.
In the midst of a deflationary gold standard during the time of America’s Great Depression, the UK was forced to abolish this currency system in favour of a flexible monetary policy. A monetary policy that can set low interest rates and let the currency and country begin a slow but necessary recovery.
In a world where the average person becomes more dependent on exchange rates being preferable, whether its from importing their clothes, working nomadically abroad or selling products overseas on Amazon, having a fixed exchange rate seems like a good antidote to anxiety.
Bringing back the security of gold
The gold standard is on the tip of many tongues, such as libertarian pundit Peter Schiff’s when reacting to speculative bubbles and high amounts of quantitative easing. Regardless of whether bringing back such a system is feasible or even preferable is up for debate and besides the point. What is a reality however, is the usefulness of hedging your own capital against gold.
Generally, it is expansionary fiscal policy in the US that causes the dollar to decline and gold prices to rise. When the US increases their deficit spending it causes inflation. Such devaluation of the world currency causes people to sell it to limit their losses, opting for more stable currencies or assets.
In the five years leading up to 2007, the price of gold rose by more than double. This was because it is a secure asset to turn to when the dollar is falling, which it had, steadily from 1.17 against the Euro in 2001 to around 0.70 in 2007. It is evident that gold and the US dollar are negatively correlated.
Holding gold in a portfolio as both a hedge against fiat currency, as well as providing diversification is often neglected by retail investors and certainly by most of the general public. Some investors may be awaiting an economic collapse in the hope of an unlikely return to a gold standard, but when using Automata to manage your money and investments, gold is extremely accessible to deal with, as it can be the main, core currency you use.
In fact, as little as £1 can be invested into an account, making it extremely manageable to invest and hold gold on a very small (or large) scale, all without the headache of going to a broker. This serves as its own gold standard, in the sense that our currency risk can be mitigated.
As most investors will know, hedging against the regular fiat currencies that we hold is important in limiting risk. With major political events occurring such as the US-China trade war and the impending uncertainty of Brexit, we are increasingly at risk of significant currency fluctuations. And whilst the gold standard may have been abandoned by central banks across the world, it doesn’t mean that everyday folk cannot gain their power back in securing their own capital against gold.
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