Is There Still a Link Between Gold Reserves and Money in Circulation?

Traditionally, the amount of money that a country was allowed to put into circulation was based on the value of gold that they had acquired. However, since the 1970’s the world’s money has not been valued on what’s known as the ‘gold standard’ as there are other convertible tradable assets that have taken its place.

Gold is a rare metal where only 100,000 tons or so have ever been mined. It is 20 times rarer than silver and 15,000 times less common that copper. This rarity value has always helped maintain its appeal and mystique.

So with gold now trading at $1,100 per troy ounce and over 100,000 tons in the world that would mean that there would only be $3,536,500 in circulation!

This makes ‘How much money is in the world?’ an ethereal question. Gold still has tremendous value as when economies or countries start to experience economic problems, investors often sell their ‘money’ and buy safer gold. Hence its value tends to increase in times of recession and drop when economies boom.

The problem is that if there is too much money in an economy then it devalues the money. This is what often occurs in countries with economies in financial difficulties and which seek to print more money without ensuring that it retains its worth. What happens is that more money enters circulation meaning that more ‘cash‘ chases the same volume of goods. In a supply and demand economy (which most in the world are) prices increase leading to inflation. Inflation devalues the worth of savings and money, which can be detrimental in the long term to wealth creation.

Of all the gold ever mined nearly 98% is still in circulation and close to 40% is held by national banks to underpin the currency value in international markets. When paper currency was introduced as a more convenient and less bulky means of payment, it was backed by a promise to deliver gold on demand to the same value. Hence, the amount of gold possessed by a country became the determining factor of how much money it could place into circulation.