From Precious Metal to Currency
From ancient times, gold and silver have been prized as a material with intrinsic value. Why gold as opposed to other materials?  Gold does not corrode and has a perpetual existence.  Silver has similar properties.   In Egypt, King Tutankhamun’s tomb contain gold treasures, which included his funerary mask.  His coffin was solid gold and weighed almost 250 pounds. In the Bible, gold is similarly precious.  In ancient times, gold is valued in cultures from Asia Minor to South America.    Gold has been  refined and cast into objects and jewelry as far back as 5000 BC.

Gold coins began being minted in 800 BC in Asia Minor.   Mycenaean, Greek and Roman civilizations used gold coin as currency.

From Minted Currencies to Paper Currencies
notesBarter, trade and gold and silver minted coins were legal currencies in early times.  Paper currency was first introduced in 600 AD by the Chinese.  Paper currency was developed because carrying commodity currency was cumbersome.   In almost all cases, the paper currency could be exchanged for a designated amount of gold or silver.  (pictures)  In theory, all circulating paper currency could be exchanged for gold and/or silver in reserve.  This is known as the gold standard.  An economy operating on the gold standard is usually protected from hyperinflation and abuses of monetary policy.

In 17th century French Canada, when the legal tenders of beaver pelts and gold and silver became scarce, playing cards were confiscated, cut up, marked with a value and distributed to the soldiers.  As the finances of the French government became increasingly unstable, the use of the playing cards continued and gold and silver were hoarded rather than being circulated in commerce.  When the playing cards became worthless as tender due to inflation, the economy did not collapse because gold and silver were placed back into commerce.  This is the power of precious metals in uncertain times.

Gold in America
In early 1933, the United States was experiencing severe deflation.  To fight this, the government by statute and executive order made significant ownership of gold illegal.   There was no longer a fixed dollar amount tied for the exchange of gold.  Later, the dollar was fixed at $35 as the exchange rate for an ounce of gold.

Fiat Currency in America
In 1944, the Bretton Woods Agreement fixed the value of the one troy ounce of gold to $35.  This lasted until 1971 when Nixon cancelled direct convertibility to gold.  In spite of the cancellation, the United States dollar was a reserve currency.

Since the cancellation of the Bretton Woods Agreement, the United States no longer back the value of the currency with gold or silver.  Instead, the United States government, like many others, have created “fiat” currency which is effectively useless paper that serves as “money” because the government decrees it is money.  Fiat currency almost always leads to hyperinflation and the end result is that the currency becomes virtually worthless.   Examples of this have occurred with the German Mark in the Weimar Republic in 1923, in 1945 in China and recently with the Zimbabwean dollar.

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Banks and Governments Investing in Gold
Central Banks gobbled up 483 ton of gold in 2015 and 2015 marked the sixth straight year that bank purchased more gold than they sold.

Likewise, China has over 1770 tons of gold in its possession, of which 100 tons were added last year.  Last year Russia was a net buyer of gold each month collecting between 4.3 and 34.5 tons per month in spite of the the ruble dropped against the dollar.  Russia now stores more than 1400 tons of gold.

it is reasonable to conclude that if central banks and governments invest in massive quantities of gold, the individual investor should consider owning precious metals as well.