What Currencies are Backed by Gold? (2020)
Historically one of the essential features of most economies has been gold. A precious metal that has been utilized as currency since 600 BC — starting as physical coins and ultimately turning into the gold standard where gold in backed paper currency in the society.
While the gold standard protects the currency from certain risks as hyper-inflation or general loss in value due to the faith in the government, it also puts limits on the government to stimulate the economy as they can’t just print up money and give it away (or buy things). This is problematic, but not as bad as one may initially think as the primary cause of such horrific economic collapses are due to effects of fiat currency that’s not backed by gold or other real assets — primarily such fiat currencies promoting debt over saving and thus extreme leverage and risk throughout the entire economy.
The End of the Gold Standard: World War 1.
During World war 1 the UK started the trend as the first large economic nation to suspend the use of the gold standard so they could be more flexible with currency and and stimulate the economy.
In non-financial speak this means their economy was contracting due to a lower over-all economic output and prosperity due to the war and wasted resources put to the war-effort, and the government began to lack the surplus to continue fighting the war as bond-raising dried up for the war-effort, so they decided to extract wealth from their citizens without directly increasing tax rates or issuing bonds to it’s citizens through literally printing money and thus debasing (taking away value) from the existing currency in their society.
It was 1930 when the UK finally dropped the use of the gold standard for good in favor of a fiat-system. This managed to save themselves from experiencing a depression to the depth of the US Great Depression. The UK was able to “stimulate” their economy and their currency without the reliance on how much gold they had or could buy. This is what you may call “kicking the can down the road” normal person speak.
The End of the Gold Standard: Fiat Becomes the New-Normal
After this occurred many European countries followed the UK’s example and dropped the gold standard “temporarily.” The cat was out of the bag and there was no way they’d let their self struggle to fund the war and “stimulate the economy” when the UK was doing it.
This changed the face of their economies and currencies forever.
The US eventually followed after the Europeans a few years later in 1933 by eliminating the gold standard. This ultimately helped the US to finally start to get out of the great depression and reinvigorate its currency and economy. This didn’t cause major issues as reserves were still kept and it was just the beginning — but as the years have went on the kicking of the can down the road has made the debt and stability worse and worse, ultimately forcing the government to make the federal reserve to try to hold things together.
The End of the Gold Standard: The Last Bastion Falls
Switzerland was one of the few places to buck this trend and maintained use of the Gold standard right up till May 1st 2000. Remaining neutral during World War 2 made it possible for Switzerland to keep hold of its gold reserves and even to profit during the war to stockpile more ensuring it had a large stock of gold when compared to the size of its population.
Even during and after the great depression, the US managed to keep hold of the majority of the world’s gold reserves. In 1944, an agreement was put in place that set the exchange rate for all currencies and gold and it was at this time the US was able to price the Dollar against its reserves. With the US holding the majority of the worlds gold supply it became easier for most of the rest of the world to start to price their currencies against the dollar instead of gold. The result of this was that currency was no longer tied to the price of gold but to the price of the dollar. The US dollar rose in value and became the standard world currency used.
This presented major issues, as with such an influx of demand for dollars, and eventual pegging of currencies to the dollar, the value of dollars drastically outsized the value of the US’s gold reserves, which gives you the current funny-money nonsense system we have today where The US’s debt can be nearly unserviceable without issue and the FED can create most recently over 100 billion dollars a day without the dollar evaporating.
In due time the kicking of the can down the road must stop though, which makes me look for the closest thing to a gold-backed currency.
What Currencies are still on the Gold Standard?
Now Switzerland has dropped the gold standard, there are no currencies that are backed directly by gold. However, this doesn’t mean that gold or other commodites are irrelevant to their economy or currency.
There are plenty of examples of countries where their wealth and currencies are able to be tracked and correlated to a specific commodity or multiple commodities. For example, The Australian Dollar is sensitive to changes in iron prices as they are the largest exporter of iron worldwide. It is for this reason that despite not being backed by their commodity asset, iron, it still has a significant effect on their currency.
Many countries have a currency that is closely linked to oil with currency and economic fluctuations coinciding with oil price changes and availability. These include large economies such as Canada, Russia, Columbia and Norway. These are all large exporters of oil, a commodity with a high value in today’s world that relies upon it as a resource.
Countries with large reserves of crude oil can track the demand and rise and fall of these resources alongside their currency. When oil prices drop, oftentimes so does the value of the currency. This correlation between commodity and currency is interesting as whilst they have an effect on a currency that can be seen and tracked they are not directly backed by these commodities.
What's the value of Commodity-Correlated Currency?
Fundamentally there’s no value to the currency — as it’s still fiat paper garbage with no real value and isn’t backed 100% by anything with actual value.
With this being said, it’s important to recognize how currencies function and recognize the benefits to commodity-correlated currencies — to spare the detail in this article and the complexities I’ll just keep it simple: Commodity-Correlated Currencies benefit from rising commodity-prices, and thus they are not as at-risk of inflation as their currencies are hedged by the production & sale of the commodities in their country.
There is no free lunch in this equation though — Commodity-Correlated currencies experience increased volatility, as in economic downturns they, in the short-term, often go down in relation to non-commodity correlated currencies due to a declining price in commodities due to a lack of demand in said commodities.
Personally I prefer to keep gold/silver and commodity-correlated currencies as cash-equivalents to US dollars as I believe the US government and dollar’s future, in the long-term, and I suspect there will be dollar inflation (and thus value destruction) in due time, which means I’d rather hold other currencies (and commodities) instead of dollars, as the real-value of those currencies are less exposed to inflation over-all and I expect inflation to be worse in dollars compared to many of those currencies.
Furthermore, commodity-correlated currencies generally are backed by their government much like Dollars — however their government, such as in the case of my favorite commodity-currency (Norwegian Krone), often have significantly less debt that the US government and in a post-dollar reserve currency world, have significant demand for their currency as it’d be needed to buy the commodities they produce — which in turn would cause their value to shoot up in correlation to dollars.
If this all seems complicated that’s because it is — just take away that currencies that are correlated to commodity prices will move in relation to the commodity price globally, which prevents inflation of the currency in the long-run. Gold and other hard assets are safer and better positioned, however come with greater volatility compared with commodity-correlated currencies that are only somewhat priced in relation to the commodities they’re associated with.
What Currencies are the closest to Gold-Backed Currency?
The Norwegian Krone is perhaps one of the best examples of a real currency that correlates closest to its commodity assets. Norway’s economy is largely dependent on the price and buying power of oil and gas commodities. It is one of the largest exporters of oil globally with a high percentage of its overall economy reliant on natural gas and oil. This is the closest we have in the modern world of a system that works similar to the gold standard (other than gold it’s self) where countries buying power and reserves are related to the price of a commodity such as gold.
Furthermore, we at Greenery Financial believe it to be the safest currency in the world as the government’s debt to GDP is one of the lowest in the world — and by a large margin compared to other western countries — and they have a massive “soverign wealth fund” that’s multiple times — currently around 8x — their entire national debt — which could pay it off entirely and buy enough gold to cover their GDP (as well as M2 money supply) by nearly 2x.
For comparison the US could sell all it’s gold reserves and not be able to pay down even 5% of it’s national debt. It has no wealth fund, and it’s gold reserves are <5% of it’s GDP. When folks say the US dollar is backed by the government, it’s meaningless. The US government is essentially bankrupt. Norway’s isn’t.
Norway also has an incredible standard of living, would not be hurt by climate change as much as other countries, a relatively peaceful and content population, and a generally stable government as well.
All this together makes Norway’s currency, the Krone, my favorite pick for the closest to a modern-day gold-backed currency, albeit just a commodity-correlated currency. Not only is it highly correlated with commodity-pricing, but it doesn’t have the systematic problems that plague most fiat currencies such as massive government, personal, and business debt that must be inflated away due to the impossibility to actually pay it off without inflation, large “too-big-to-fail” monstrosities rather than small businesses that can adjust easier and do not present as much risk if one makes bad decisions, and many many things that overall make the Krone dang-near the safest a fiat currency could possible be.