What Gold Buyers Need To Understand About The End Of Gold-Backed Currency

In order to truly appreciate how valuable gold is and to get a better understanding of gold-related investment, you first need to understand a bit of the history of the worldwide transition from gold-backed to fiat currency.

The Transition From Gold-Backed To Fiat Currency

For thousands of years, gold was either used as a currency or as a backing for currency, but this changed in the recent past. It has also been used as an investment product for a long time, which still continues to this day. Currency that is backed by the precious metal is simply called 'gold-backed currency'.

On the other hand, 'fiat currency' isn't backed by gold, silver or even real estate. Moreover, such a currency isn't created by the free market, but it's instead created by fiat (a decree or arbitrary order) of the government. Virtually all currency in the entire world is a fiat currency. This includes the Australian dollar, US dollar, Great Britain pound, euro, Japanese Yen and many others.

If you're wondering when all currencies shifted from gold-backed to fiat, it all started in 1944. The World Bank archives reveal that representatives from 44 major countries of the world met at the Bretton Woods Conference (officially called the United Nations Monetary and Financial Conference) where the International Monetary Fund (IMF) was created. The IMF served the purpose of maintaining a fixed exchange rates system, based on the US dollar and gold (this was the first deviation from purely gold-backed currency).

The US Department of State goes further to reveal that the move from purely gold-backed currency was further advanced in 1971, when the US dollar's convertibility into gold was suspended by President Richard Nixon. Finally, in 1973, the major industrialized nations all adopted floating exchange rates (an exchange-rate regime whereby the currency fluctuates based on the foreign-exchange market) as the norm for their currencies.

How Gold Buyers Benefit From The Fiat Currency/Floating Exchange Rates

Although a currency's value under floating exchange rates primarily depends on the strength of the economy, many variables can affect this value in the short term. These include such aspects as: new home sales, retail sales, sentiment of traders and non-farm payroll. This has the effect of making gold an excellent product to hedge against inflation, since it isn't attached to currency. Such a beneficial aspect has made this precious metal quite popular as part of the portfolio for experienced investors.

When looked at critically, the only thing that is backing money is the credit of the government. Therefore, increasing money supply effectively leads to lowered purchasing power of the dollar, which is comparable to what happens when companies issue extra shares of stock , hence diluting ownership of existing owners. On the other hand, gold remains consistent, while maintaining its inherent value, which makes it a reliable investment. Moreover, this precious metal has been consistently increasing in price, even during currency inflation (by February 2014 the gold price per ounce had reached a high of US$1,323.25, based on data from the Queensland Parliamentary Library and Research Service).


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Abraham has had a successful career making wise investments. Gold buyers can benefit from his rich insights to reap handsome profits. You can also visit http://sellgoldsydney.com/ to get more info.