Foreign Exchange: A Practical Guide to the FX Markets

APPENDIX

Precious Metals

The history of money and precious metals are inexorably linked.¹

—Peter Bernstein

 

 

 

Even though gold and silver have served as money in the past, they are generally recognized today as commodities and are not categorized as money (unless “minted” as in the case of South African Krugerrands and Canadian Maple Leaf coins, and even then, the market values of such coins are based on their metal content and not contingent upon their struck denominations). ² Having said that, gold is still sometimes employed in international trade settlements and often linked to the foreign exchange departments of banks and broker/dealers.

When the major currencies abandoned the gold standard (that is, when the paper currencies of these countries were no longer redeemable or convertible into gold), a disconnect occurred. To this day, some economists believe that severing the link between precious metals and fiat currency is regrettable, as it affords a far more capricious approach to monetary expansion (and therefore the possibility of inflation) than before. Increasing the money supply by 10% under a gold standard could only happen if the supply of precious metal was comparably increased. This requirement imposed a discipline on governments and politicians which, under most modern forms of monetary creation and expansion, is unthinkable (or at least unnecessary).

Some economists have even gone so far as to suggest that for every X units of currency printed and spent by the ...