Gold bullion is first and foremost a monetary asset. This is what distinguishes it from gold jewellery. Additionally, bullion coins can be very attractive objects, and even a gold bar has a certain allure, especially if it carries the exotic markings of a long-defunct government – that of the Russian Tsar, for example. But what makes it “bullion” is the fact that its value derives simply from what it is, namely the best-known, most sought-after and the most widely accepted of the precious metals – gold.
Gold as a Form of Currency
Bullion, in whatever form, is essentially a form of currency. Gold bullion may not have been issued by a central bank or national treasury, but it is a form of money nevertheless. Ask the International Monetary Fund, which strives to keep the world economy on track. They themselves own reserves containing billions of dollars’ worth of gold bullion. Indeed, ask just about any central bank or finance ministry, such as the US Treasury (a large part of whose gold reserves are, famously, held next to the huge Fort Knox army garrison in Kentucky) or the Bank of England (which hold billions worth of gold bullion on behalf of Her Majesty’s Treasury).
An International Asset
For governments around the world, gold is the “asset of last resort”, the ultimate long-stop in case of emergency. In the 1997 Asian financial crisis for example, patriotic women in South Korea handed in their wedding rings to help bolster the authorities’ monetary firepower. Here in Britain in 1914, on the outbreak of the First World War, when the country’s gold reserves needed all the support they could get, gold Sovereigns were withdrawn from circulation to help finance the impending conflict.
The Gold Standard
Until 1914 and the outbreak of the First World War, the link between paper money and gold was explicit, hence the “promise to pay” on British banknotes. Then between 1945 and 1971, western currencies were tied to the US dollar which, in turn, was tied to gold – at the rate of $35 a Troy ounce.
The last of what used to be called the “gold standard” ended finally in 2000, when Switzerland broke the link between its currency issue and gold. However, the expression lives on, used to describe everything from tough-to-pass school examinations to the very best in luxury motoring. Used, in other words, to describe something of the highest quality.
Gold’s Monetary Role
While the formal gold standard is long gone, gold’s monetary role remains, and not only in the above mentioned sense of occupying the vaults of central banks and finance ministries. Both The Sovereign and Britannia bullion coins are legal tender in the UK, and while worth far more than their face value, they retain a link with the world of pounds and pence.
The fact that this one metal plays such an important part in the world’s financial system may seem strange in an age of instant computer transfers and “cyber-currencies” such as Bitcoin. However, throughout history, gold has showed its value and resilience as a monetary asset time and time again.