What does gold mean in the 21st century economy?

Bringing back the economy’s gold standard

According to Christian Post, gold is a pillar of “tangible and transportable wealth.” It’s been a staple of the global currency, as its price dictates the stability of the economy. Even though it’s no longer being used as a primary form of currency, there is still a strong connection between its real value and the strength of trading in foreign exchanges. From this comes the underlying question: What does gold mean in the modern-day economy?

Price of gold

According to Bullion Vault , the prices of the metal slipped below $1320, as the US government continues to shut down and the European stock markets continue to drop. Aside from the declining economy, the devalued price of gold depends on the prevailing policies of central banks. People who are given a higher interest rate are likely to invest in currencies, whereas lower rates will increase gold purchases. Other factors include the investment demand, government spending, and mine production.

The Gold Standard

Today, all countries employ the fiat money system (the currency declared by the government as the legal tender), instead of the Gold Standard, which ensured that money is backed by a fixed asset. However, the Huffington Post argued that going back to the old standard affects different aspects, including wages, a financial crisis, and global instability. Also, the Gold Standard has played a major role in the Great Depression, which was characterized by deflation and a high unemployment rate.

Should US retreat back to the Gold Standard?

During the great recession in the US in 2008, economists and private investors hoped for a shift back to the gold standard. While it has induced positive impacts, Reuters said that this will erase the credibility of the US dollar, and increase the risk of a trade war with other allies. Also, economist Kimberly Amadeo said that the US doesn’t have enough gold to pay its debt from foreign governments. She said that the gold standard would lead to a case of deflation, prompting the economy back to another depression.

Perspective of private investors

From the perspective of the private investors, the price of gold determines how healthy the economy is. A high price of gold indicates an unhealthy trade, wherein investors resort to the metal to protect their investments from an inflation or a crisis. On the other hand, a low price of the metal indicates a healthy trade, as investors favor more profitable investments such as real estate and stocks.