This blog post is a guest post on BullionStar's Blog by the renowned blogger JP Koning who will be writing about monetary economics, central banking and gold. BullionStar does not endorse or oppose the opinions presented but encourage a healthy debate.
The poster child of a cashless society is Sweden. There are all sorts of anecdotes about beggars accepting cards, churches passing around mobile payments devices instead of collection plates, and banks no longer providing customers with cash. It is no wonder then that Sweden is the only country in the world to show a decline in banknotes and coins in circulation, the quantity of cash outstanding having fallen from 109 billion SEK in 2006 to 56 billion SEK in 2018. If you want to read more, I wrote about the Swedish miracle on my Moneyness blog here.
The death of cash scenario portended by Sweden is contradicted by another Nordic nation, Iceland. If Sweden is close to the forefront of the cashless revolution, Iceland is not only ahead of it but at the very front of the pack. No country does more point-of sale payments per capita than Iceland, clocking in at 426.9 in 2016. Whereas Sweden has an incredibly low cash-to-GDP ratio of around 1.75% , Iceland was already all the way down to an impressive 1.2% by the early 2000s! (The cash-to-GDP ratio is the number of banknotes and coins outstanding at the end of the year divided by yearly GDP. I get these numbers here).
One would probably be safe in assuming that, like Sweden, Iceland is characterized by a steady decline in banknotes and coins outstanding. But this isn't the case, as the chart shows below.
Not all Scandinavian countries are going cashless. You can see precisely when Icelanders lost trust in their banks and began cashing out of deposits into notes. pic.twitter.com/fN0i1dY9s7
Since the 2008 credit crisis, Iceland has seen a tremendous resurgence in the demand for cash. Not only is the rate of growth in króna notes and coins in circulation far exceeding that of Sweden, but as the chart below illustrates, it is also far ahead of euro cash growth. As for Iceland's cash-to-GDP, it has doubled to around 2.4% since the crisis, which means that the island nation is now more cash intensive than Sweden.
What is happening? It may be useful here to borrow from a recent Bank for International Settlements (BIS) paper Payments are a-changin’ but cash still rules and differentiate between means-of-payment and store-of-value demand for coins and banknotes. It is unlikely that the resurgence of Icelandic cash demand is due to payments needs. Rather, I'm going to show that it is probably due to the latter type of demand, store-of-value. This sort of demand occurs when people indefinitely lock away a few extra bills in a safe as opposed to putting them in their wallets for tomorrow's grocery run.
The easiest way to try and determine when cash is being held as a store-of-value or a means of payment is to observe the denomination structure of coins and banknotes. In theory, larger-denomination notes, which are less cumbersome, are mostly held as a store of value whereas smaller ones will tend to be used in payments. Below I've charted the evolution of Iceland's denomination structure over time.
You can see that growth in low-denomination banknotes and coin slightly exceeded growth in higher denomination notes until the 2008 financial crisis, at which point the demand for high denomination banknotes exploded. In 2013 the Central Bank of Iceland even introduced a new note, the 10,000 krónur (currently worth around US$96), to meet Icelander's growing store-of-value requirements.
According to the BIS paper, one factor that drives the demand for notes as a store of value is the level of interest rates. If you choose to hold cash, you're losing out on interest, but the lower the interest rate the smaller your loss and the more attractive a large-denomination banknote gets. Indeed, the BIS report finds that lower interest rates all across the world explain a large part of the post-crisis global thirst to hold high denomination banknotes like the €500 note, 1000 Swiss franc, ¥10,000, or US$100, as illustrated in the chart below. This may be the case in Iceland too, since rates have fallen quite a bit since 2008.
Iceland is somewhat unique because of the terrific damage sustained by its banks during the credit crisis. All three--Kaupthing, Glitnir, and Landsbanki--went bankrupt. Prior to the crisis Landsbanki had established a banking presence in the UK and Netherlands. Iceland's government refused to meet its deposit insurance commitments for these foreign customers while protecting Icelanders. The crisis revealed that the safety of both Iceland's banks and its deposit guarantee scheme were less assured than most had previously thought. This may explain some of the explosion in hoarding of Icelandic banknotes. Notes, after all, are a direct promise of the government and are free from the sort of default risk that bedevils a private deposit.
In addition to having a financial incentive to hold more banknotes, Icelanders also have emotional reasons for doing so. They are resentful of bankers, who are rightly viewed as the ones most responsible for placing Iceland in such a precarious position on the eve of the '08 financial crisis. Some 26 bankers have received sentences of up to five years, which makes Iceland the only nation to have imprisoned bankers for their role in the crisis. The country has even flirted with the idea of sovereign money, a monetary system in which private banks can no longer issue money, abdicating that role to the the state.
In this context, it is no wonder that demand for high denomination banknotes is growing. Angry Icelanders can register their protest votes against the banking system by storing five 10,000 kronur notes under their mattress for a rainy day instead of holding 50,000 krónur in a low-yielding savings account.
To sum up, Iceland and Sweden are both leading the world in digital payments. Yet while Sweden hints at a world in which digital payments lead to cash's demise, Iceland tells us something different. Even in a world where everybody pays with a card or an app, people may still want access to old-fashioned cash. First, banknotes and coins are still useful in a number of payments situations, say when payments systems have gone down or in coin-operated laundry machines. In Iceland's case, this is confirmed by continued growth in small-denomination banknotes and coins outstanding, which are keeping up with GDP growth.
But even more importantly, Iceland shows that banknotes--in particular large denomination ones--are a universally available ultra-safe investment. It took a crisis for this to be evident, since when times are normal people are quite content to hold riskier bank-issued claims on banknotes. Other government instruments like t-bills and bonds also provide the same degree of safety as a banknote. But these require a degree of financial sophistication to purchase, and are thus less accessible than cash, which is widely available and easy to buy.
As policy makers navigate the future of cash, in particular that of high denomination banknotes, the Swedish model has become a much discussed benchmark. But it would be irresponsible of policy makers if they failed to consider its fellow Nordic nation, Iceland, as an equally informative model.
As part of its continued growth and success, BullionStar has recently fulfilled its order number: 100,000. To mark this significant milestone, BullionStar issued a 2.5 gram PAMP Gold Bar to the lucky BullionStar customer in question. The customer order was placed by Mr. Ito from Japan, who was on holiday recently in Singapore with his wife when he visited BullionStar's shop and showroom in central Singapore.
Mr. Ito said he was delighted with the PAMP gold bar prize and commented that he was very lucky on what was his first visit to BullionStar. He also returned the following day to make further purchases. Mr. Ito also liked the easy to locate BullionStar showroom, the competitive bullion prices, and the fact that the many bullion display cases make comparisons easy when selecting products.
Established in 2012
This latest milestone is one of a continuing series of notable milestones for BullionStar since its establishment in Singapore 6 years ago. During this time BullionStar has gone from strength to strength and is now firmly established as the best bullion dealer in Singapore and the Asian region, as evidenced by BullionStar recently winning Bullion Directory's bullion dealer of the year award, as well as one of the most recognised bullion dealers internationally with customers from over 100 countries around the world.
Upon establishment in 2012, BullionStar's offices were initially located in the Marina Bay Financial Centre in the downtown Central Business District (CBD) of Singapore. Prior to 2012, BullionStar's founders were already familiar with the bullion dealer sector having set up several bullion dealers such as the Swedish company Liberty Silver AB.
BullionStar's launch in Singapore in 2012 came as the Singaporean Government introduced a Goods and Services Tax (GST) exemption on transactions in investment precious metals (IPM). The GST exemption on IPM means that any time customers purchase qualifying bullion bars and bullion coins from BullionStar, the prices paid are free of GST, since there is no sales tax to pay. Other compelling reasons for establishing a bullion and storage operation in Singapore included the fact that Singapore is one of the safest countries in the world and has a stable jurisdiction, a strong rule of law, no reporting requirements on any bullion transactions, and a government which supports the growth and development of the bullion industry.
BullionStar's philosophy as a leading bullion dealer is grounded in innovation, internationalization, and constant evolution, both in-store and on-line. In January 2013, BullionStar launched its fully-transactional online trading platform, allowing customers around the world to buy and sell precious metals bars and coins at the click of a button on the BullionStar.com website.
In July 2014, BullionStar opened its current shop, showroom and integrated vault in central Singapore at 45 New Bridge Road, adjacent to both Clarke Quay MRT, and Singapore's Central Business District (CBD), as well as less than minutes walk from Singapore's Chinatown. This spacious showroom, with over 20 display cases, allows customers to browse and purchase a huge variety of gold bars, silver bars, gold coins and silver coins from the world's leading precious metals mints and refineries.
With BullionStar's secure precious metals vault integrated into the shop and showroom, customer purchase orders for precious metals can be immediately dispatched in the shop, and customers can also view and audit their precious metals holdings held in storage in the vault.
The Widest Range of Precious Metals Products
BullionStar now stocks one of the widest ranges of precious metals bullion products in the world, sourced from all of the world's leading precious metals mints and refineries, with over 600 different products across 10 product categories. These products include gold bullion coins and silver bullion coins from leading national mints such as the Royal Canadian Mint, US Mint, Perth Mint, Royal Mint and Austrian Mint, coins such as Gold and Silver Maple Leafs, Gold and Silver Eagles, and Gold and Silver Kangaroos. BullionStar's wide range of gold bars and silver bars is sourced from prestigious precious metals refineries such as Heraeus of Germany, PAMP and Argor-Heraeus of Switzerland, and from national mints such as the Perth Mint and the Royal Canadian Mint.
In 2015, BullionStar also launched it's now very popular BullionStar branded gold bar and silver bar range. These products, the BullionStar 100 gram Gold Bar, produced by Argor-Heraeus of Switzerland, and the BullionStar 1kg Silver Bar, produced by Heraeus of Germany, can be traded without any spread between the buy price and the sell price.
As well as the comprehensive range of gold, silver and platinum bullion bars and coins, BullionStar also stocks a wide selection of gold and silver collectible and numismatic coins, a range of gold bullion jewelry, and a wide array of coin related products for storing and correctly handling and displaying your precious metals coins and bars.
Secure Storage in one of the Safest Countries in the World
BullionStar provides full service operations in all aspects of bullion sales, storage and other services. Opening a BullionStar account can be undertaken in a matter of minutes, and purchasing bullion either in the shop and showroom or online on the BullionStar website is a simple and intuitive process. Customers purchasing precious metals bars or coins can opt to pick up their purchases in person, have their products delivered to their address, or have their precious metals stored in BullionStar's secure vault facility which is integrated into the shop and showroom premises.
BullionStar's secure precious metals storage solution goes far beyond just storage of precious metals as it provides full online control allowing customers to buy, sell, physically withdraw or physically audit their bullion at any time. With Bullionstar's Vault Storage, customers can generate vault certificates online, view pictures of stored bullion, generate a live audit report of metal that they hold in storage, and view certificates evidencing vault insurance.
Metal grams held in vault storage through the BullionStar Savings Programs (BSP) can also be converted into either gold bars, silver bars or platinum bars, and can then either be held in storage or withdrawn and delivered.
Consistently Profitable and Strong Revenue Growth
Although the precious metals markets are at time opaque and closed to transparent information flow, BullionStar pursues a policy of transparency and openness as regards its operations, financial results and investor relations. BullionStar publishes highlights of its annual performance on its website with full commentary and infographic analysis. Customers therefore have visibility around BullionStar's revenues and product mix and can be confident about the company's financial standing and stability.
It's notable that BullionStar has grown revenues strongly in every financial year of operations. BullionStar's financial year (FY) runs to 30 June each year. In FY 2014, BullionStar recorded revenues of SGD 44.1 million. For FY 2015, revenues grew 43.8% to SGD 63.4 million. Revenues then almost doubled year-on-year in FY 2016, rising to SGD 129.2. For the latest financial year, FY 2017, BullionStar recorded revenues of SGD 174.7 million, which was 35.2% higher than FY 2016.
This very strong and solid revenue growth means that BullionStar revenues have more than quadruped between FY 2014 and FY 2017, growing by a staggering 422% over that time. This revenue growth is a testament to strong and loyal customer order growth and underpins the growth and stability of BullionStar's operations over the period since its inception.
Recognition, Media Interest, and Research and Analysis
In another sign of BullionStar's continued growth and recognition, this year BullionStar won the inaugural award of "Bullion Dealer of the Year" Rest of World category in The Bullion Directory's annual bullion awards. These awards are recognised and valued throughout the global bullion industry, and BullionStar secured its victory after nomination and public voting against many bullion dealers from across the globe.
Since its establishment, BullionStar's precious metals articles, blogs, research and infographics analysing the gold and silver markets have become well-known and highly-regarded around the world, with blogs and analysis from precious metals analysts such as Ronan Manly and Koos Jansen, and guest posts from renowned bloggers such as JP Koning. BullionStar aims to continue to lead the way in original precious metals documentation, views and commentary, and has developed sections of the BullionStar website including the educational Gold University and the topical in-house 'BullionStar Blogs' series of articles. BullionStar was also at the forefront in publishing original analysis about important gold markets such as the Chinese Gold Market, and stylish visual infographics on such topics as the London Gold Market.
BullionStar's articles and analysis are regular picked up and distributed on many other websites across the world, both by websites within the gold space and by more general financial and investment websites. BullionStar articles are also regularly translated into other languages and have been featured on sites as diverse as French, German, Spanish, Russian and Chinese language websites.
BullionStar is regularly quoted in the major financial media for views and commentary about the precious metals markets, and has been cited and quoted by such publications and websites as Reuters, Bloomberg, the Wall Street Journal, the Guardian, RT.com, Sputnik News, Straits Times of Singapore, and CityWire Asia. BullionStar staff and analysts have also featured on Channel News Asia and Channel 8 News in Singapore, as well as Real Vision TV, and German TV network DAF. BullionStar also continues to produce its own series of video interviews which feature prominent members of the global precious metals markets such as legendary US investor Jim Rogers or prominent Canadian gold market entrepreneur Eric Sprott.
As well as a strong international customer base, BullionStar places particular emphasis on being international in outlook, and at times presents at events internationally such as FreedomFest in Las Vegas and attends precious metals events and exhibitions, such as the International Money Fair in Berlin. As one of the largest retail bullion dealers in Singapore, BullionStar now also contributes to assisting precious metals consultancies such as Thomson Reuters GFMS in gauging retail investment gold and silver demand in the Singaporean bullion market.
Payment Mechanisms Include Cryptocurrencies BTC, ETH, LTC and BCH
Payment mechanisms are also another area in which BullionStar aims to provide greater customer choice and continued innovation. As well as facilitating payments for precious metals purchases funded by bank transfer, NETS and Cheque, BullionStar also accepts 6 leading national cash currencies, namely the Singapore Dollar, US Dollar, Euro, Japanese Yen, Australian Dollar and Swedish Yen, and also four of the leading cryptocurrencies.
BullionStar began accepting Bitcoin as a payment method for precious metals in May 2014 and was one of the first bullion dealers worldwide to do so. In another first, Ethereum, Bitcoin Cash and Litecoin have just been added to the list of leading cryptocurrencies which can be used to purchase precious metals at BullionStar, and with this move, BullionStar is one of the first bullion dealers worldwide to accept payment in each of BTC, ETH, BCH and LTC. Customers selling bullion to BullionStar can also opt to receive proceeds of sales in either Ethereum, Bitcoin Cash, Litecoin or Bitcoin.
In September 2015, with the introduction of a Stored Value Facility, BullionStar began offering customers the ability to keep funds on account in their BullionStar accounts in a similar way to a bank account. The facility also means that funding precious metals purchases can be undertaken instantly without needing to transfer funds in, and proceeds from precious metals sales can be kept on account until next needed.
As well as being able to purchase a wide variety of investment precious metals, BullionStar customers can also sell precious metals coins and bars, such as gold, to BullionStar. This can either be precious metal which customers hold in storage in BullionStar's secure vault and wish to sell, or else bars and coins which customers send to BullionStar or drop-in in person in the Singapore shop and showroom. Additionally, through the Gold Buyers brand launched by BullionStar in August 2013, BullionStar offers competitive prices for gold jewelry and precious metals scrap.
Having been awarded a Bullion Dealer of the Year award in 2018 via public voting in the Bullion Directory annual awards, and with strong revenue growth in every financial year since inception, BullionStar's milestone of order number 100,000 is again testament to its loyal and growing customer base both in Singapore and the Asian region, as well as across the precious metals community worldwide.
BullionStar is pleased to announce that it has added Ethereum, Bitcoin Cash and Litecoin as transactional currencies for both buy and sell orders on the BullionStar website.
Many BullionStar customers are already be familiar with using Bitcoin when buying and selling gold, silver and platinum bars and coins, as BullionStar has been accepting Bitcoin as a form of payment since May 2014. BullionStar was one of the first bullion dealers worldwide to offer customers the ability to buy and sell physical precious metals using Bitcoin. Now with the addition of Ethereum, Bitcoin Cash and Litecoin, BullionStar is again one of the first bullion dealers in the world to offer customers the ability to transact in these other leading cryptocurrencies for both buy and sell orders.
With the addition of these three additional cryptocurrencies, BullionStar customers can now buy and sell physical gold bars, gold coins, silver bars, silver coins, platinum bars and platinum coins using Bitcoin (BTC), Ethereum (ETH), Bitcoin Cash (BTC) and Litecoin (LTC), and by using any of six traditional currencies, namely Singapore Dollars, US Dollars, Euro, Australian Dollars, Japanese Yen, and Swedish Krona.
BullionStar constantly aims to add innovations to its product and service offerings, and the addition of Ethereum, Bitcoin Cash and Litecoin comes after careful analysis and following customer feedback. The addition of Ethereum, Bitcoin Cash and Litecoin now gives BullionStar customers extra choice when buying physical precious metals using cryptocurrencies, and allows for faster cryptocurrency transaction confirmation times.
Settle Bullion Orders in Ethereum, Bitcoin Cash & Litecoin
To pay using a cryptocurrency, select the preferred cryptocurrency in the "Currency" drop-down box at the top right hand section of the BullionStar hompage. Upon selection, all prices in the product listings will be displayed in terms of your selected cryptocurrency.
To purchase precious metals on the BullionStar website, you simply add the desired items to your shopping cart, go to the checkout and place your order. If you have selected a cryptocurrency as currency, the checkout payment option will default to the selected cryptocurrency as well.
Upon placing your order, the order confirmation page and order confirmation e-mail will detail the cryptocurrency address to which you must initiate your payment within 20 minutes.
BullionStar will update you with a payment confirmation e-mail and an SMS text message as soon as we have received and processed your payment.
Likewise, for customers selling precious metals to BullionStar, proceeds can now be received in Ethereum, Bitcoin Cash and Litecoin as well as in Bitcoin.
Bitcoin, Bitcoin Cash, Ethereum & Litcoin as Currency
On the BullionStar website, all product prices for gold bars, silver bars, gold coins, silver coins, BullionStar Savings Program (BSP) and other precious metals products can now be displayed in Ethereum, Bitcoin Cash and Litecoin as well as in Bitcoin.
Customers can also view spot prices, portfolio values and account history directly denominated in the newly added cryptocurrencies. For example, if you select 'Litecoin' from the Currency drop-down box on the top right of the BullionStar homepage, the spot prices and charts on the right hand frame for gold, silver, platinum and palladium are then displayed in terms of Litecoin (LTC) values. When logged in to your BullionStar account, your vault balance and cash balance will also be displayed in LTC if the Litecoin currency option has been selected.
Ethereum, Bitcoin Cash and Litecoin have also been added as currencies within BullionStar Charts.
BullionStar Charts is a comprehensive charting facility which provides the ability to create price charts for precious metals, currencies, commodities, stock indexes, individual stocks (equities) and also in terms of the prices of BullionStar products.
BullionStar's charting functionality allow any two prices to be selected. For example, on the charting page select 'Precious Metals - Gold' then select 'Currency - Bitcoin Cash' to view a price chart of the gold price in terms of Bitcoin Cash.
Why Ethereum, Bitcoin Cash and Litecoin?
BullionStar has added Ethereum, Bitcoin Cash and Litecoin as transactional currencies alongside Bitcoin because each of these three cryptocurrencies is widely-known and widely-used, and each of these cryptocurrencies is now firmly established in the marketplace.
Since its commercial launch in 2015, the Ethereum blockchain platform and its Ether coin have become a dominant force in the cryptocurrency space, and as well as transaction processing, Ethereum also supports smart contract functionality and the development of other cryptocurrency platforms.
Bitcoin Cash emerged in early August 2017 as a hard fork when it was split off from the Bitcoin blockchain. Bitcoin Cash has a larger blocksize than Bitcoin and facilitates higher transaction rates than Bitcoin which generally translates to faster payments and confirmations. In the 9 months since its launch, Bitcoin Cash has seen large-scale adoption by merchants and is now a stable and expanding competitor to Bitcoin.
The Litecoin platform and its coin, launched in 2011, are also based on the Bitcoin blockchain design, and Litecoin is now well established and known for its high-speed transfers rates and short confirmation times.
In terms of cryptocurrency market capitalization (market cap) or total outstanding market value of each coin, Ethereum, Bitcoin Cash and Litecoin have among the highest values of all crypto coins next to Bitcoin, and the global cryptocurrency trading market values the infrastructure of these cryptocoin networks, and most importantly, given that exchanges are forward-looking pricing mechanisms, the crypto currency market is signalling confidence in the longer term future prospects of these four cryptocurrencies.
Trade Directly between Cryptocurrencies and Precious Metals
With the ability to buy and sell precious metals using Bitcoin, Ethereum, Bitcoin Cash and Litecoin, BullionStar customers can now trade directly between investment precious metals and cryptocurrencies without having to first convert to fiat currencies. Traders can also now take profits from these cryptocurrencies and directly buy precious metals using their Ethereum, Bitcoin Cash, Litecoin and Bitcoin.
Trading between Ethereum and bullion for example, you can now buy gold bullion bars and gold bullion coins through BullionStar using Ethereum and hold these investment grade bars and coins in BullionStar's vault. All you have to do is transfer Ethereum from your Ether wallet or crypto exchange account wallet to the Ethereum address as indicated on the order confirmation from BullionStar. The same applies for Bitcoin Cash, Litecoin and Bitcoin.
Then in the future If you want to sell these gold bars and gold coins and take the proceeds in Ethereum, you just sell the precious metals for Ethereum and have the Ether transferred to your personal Ether wallet or crypto exchange account wallet. There is no need to first convert the Etheruem to US dollars to buy your chosen gold bar and coin products. Thus the intermediate step of converting the main crypto currencies to fiat currencies, such as US dollars is redundant.
This blog post is a guest post on BullionStar's Blog by the renowned blogger JP Koning who will be writing about monetary economics, central banking and gold. BullionStar does not endorse or oppose the opinions presented but encourage a healthy debate.
People often throw out the phrase "gold standard" into conversation, but it's worth keeping in mind that there have been several iterations of the gold standard over the course of history. This article describes each type of gold standard using historical examples for clarity.
1. The Gold Coin Standard, or Specie Standard
-Bimetallic Coin Systems-
Medieval coinage systems were typically bimetallic, relying on both gold and silver. To ensure the realm was well-supplied with coins, the monarch maintained a network of mints. Mints in the medieval times operated very differently than they do now. According to the principles of free coinage, access to these mints was available to anyone. By bringing their stash of raw precious metals to the mint, members of the public could ask the mint master to turn it into a specified number of coins, albeit for a fee.
To ensure that a variety of large and small transactions could be made by the public, the mint typically produced a range of small and large coin denominations. In England's case, by the 1500s it was issuing pennies, farthings (1/4 pennies), groats (4 pennies), testoons (12 pennies), half crowns (30 pennies), gold nobles (100 pennies), and more.
Minting low denomination coins like farthings and pennies out of gold was generally not a feasible option because the resulting coin would be tiny and easily lost. Twinning gold with a large amount of base metals like copper might have resulted in a larger and more manageable low-denomination gold coin, but then it would be susceptible to counterfeiting. As for high denomination silver coins, they would be large and bulky. Thus bimetallism amounted to a sensible sharing of the monetary load by both gold and silver coins.
-Accidental Monometallic Gold Coin Systems-
Bimetallic standards sometimes careened off course and became what are known as monometallic standards, with either gold or silver dominating. Thus emerged the first true gold standards, albeit entirely by accident. The mechanism underlying this muddling into monometallism was rooted in the fixed price between the two metals as enforced by the monarchs' mints.
To illustrate how this fixed price worked, consider that in August 1464 anyone could bring raw silver to the London Mint and have it minted into English pennies that contained 0.72 grams of silver. The mint would also turn raw gold into English nobles which contained 6.69 grams of gold. Since law stipulated that a noble was worth 100 pennies, that meant that the mint effectively valued a fixed amount of gold at 11 times the same amount of silver. (I get this data from John Munro [pdf]).
When the mint's chosen gold-to-silver ratio diverged too far from the global market ratio of gold-to-silver, then one of the two metals would begin to be ejected from the domestic monetary system. The reason for this is that a divergence effectively meant that the monarch was undervaluing one metal and overvaluing the other, and since no one who owned gold (or silver) coins wanted their property to be less than its true worth, the undervalued metal would be taken off the market.
For instance, if the mint was undervaluing silver, then anyone who purchased £1000 worth of raw silver and brought it to the mint for conversion into coins would get less purchasing power than if they had bought £1000 worth of gold and bought it to the mint. So the flow of silver to the mints would grind to a halt. Furthermore, any high quality silver coin already in circulation would be sent overseas in order to take advantage of the true gold-to-silver ratio. At this point a gold standard had emerged.
England stumbled onto a monometallic gold standard in the 18th century after having operated on a bimetallic basis for centuries. The gold-to-silver ratio used by the mint in the later 1600s and early 1700s undervalued silver and overvalued gold, so England's silver coins were steadily being shipped to the continent, causing silver coin shortages. Isaac Newton, the famous physicist who was appointed Master of the Mint in 1699, counseled the government to bring the ratio in line with the market. But when he finally moved to fix the problem in 1717, he undershot the amount of adjustment necessary, so that silver remained undervalued and the export of silver coins continued. Thus England was pushed onto a gold standard.
-The Hybrid Circulation of Coins and Paper Money-
By the 17th century, banknotes had joined coins in circulation. Paper money was originally convertible into a fixed amount of coins, issuers holding enough reserves in their vaults to ensure that ready convertibility was possible. A banknote is far easier to carry and handle than a coin, and since the public generally trusted the issuers of these notes, gold coins were pushed out of circulation and into bank vaults or non-monetary uses like jewellery. By the 1800s, it was rare to see a gold coin circulating in England.
Even as banknotes came to dominate, the British standard effectively remained a gold coin standard. Since a banknote was convertible into a fixed amount of coin, the note's purchasing power was regulated by the value of the coin itself. If there was any divergence between the two, say notes became more valuable than underlying coins, than arbitrageurs would push them back into line by buying coins for 99p and converting them into £1, earning 1 penny in risk-free profits.
Substituting out metal with paper resulted in a cheaper payments system. Adam Smith was one of the earlier writers to comment on this, describing gold and silver coins as a highway that "carries to market all the grass and corn of the country." Bank-provided paper money was a more superior sort of thoroughfare, in Smith's words a "waggon-way through the air." The replacement of gold by paper money allowed the nation to convert barren highways - its metallic coinage - into goods pastures and cornfields, thus increasing the annual produce of the country.
2. The Gold Bullion Standard
If gold coins weren't used much in trade, might it be possible to cease minting them altogether yet remain on a version of the gold standard? This was the idea behind the gold bullion standard, first conceived by the famous English economist David Ricardo in early 1816 and eventually adopted in Britain some one hundred years later, in the aftermath of WWI. Under a bullion standard, an issuer of paper money promised to redeem its banknotes not with gold coins, or specie, but for a given amount of raw bullion.
At the same time, the mint ceased to allow free coinage of gold, effectively closing itself to the public. Existing gold coins were called in and demonetized. The mint now focused its resources on providing the government with low denomination token coins for use as small change. The value of token coins wasn't regulated by the metal inside of them. After all, a token coin with the face value of £1 might contain just a few cents worth of silver, copper or nickel. Rather, a £1 token circulated at its face value of £1 because the monetary (or fiscal) authority promised to buy those tokens up at their face value.
The adoption of a gold bullion standard resulted in a reduction in the costs of running the payments system. By pushing gold coins entirely out of circulation and replacing them with a combination of token coins and paper money, gold was conserved and could be put towards better uses. It was one step forward towards Adam Smith's waggon-way through the air.
3. The Gold Exchange Standard
A gold exchange standard takes the principle of gold conservation even further. Where the shift onto a gold bullion standard meant that any institution that issued paper money was now obligated to redeem their notes with raw bullion rather than coins, under a gold exchange standard these same issuers could no longer redeem their notes with raw bullion but were required to offer notes of a second-party issuer that was itself on a gold coin or gold bullion standard.
A number of nations adopted this sort of standard in the 1800s and early 1900s, including the Philippines and India. But perhaps the most famous example was the Bretton Woods system that dominated after WWII up until 1971. Under the Bretton Woods system, the U.S. Treasury promised to redeem its notes directly for gold. Most other nations in turn agreed to redeem their notes with a fixed quantity of U.S. Dollars. So while French Francs and Japanese Yen and Canadian Dollars weren't directly redeemable in gold, they were indirectly convertible.
4. A Partially Convertible, or Limping Gold Bullion Standard
Limping standards originally emerged when bimetallic coin standards were adjusted in such a way that the mints continued to allow free coinage of one of the metals, say gold, but ceased to freely coin the other, say silver. The silver coins were not removed, however, and continued to circulate along with gold coins, the silver coinage "limping on" so to say.
But we are more interested in the limping standard's more modern incarnation, a partially-convertible gold bullion standard. Rather than allowing everyone the ability to redeem paper banknotes for gold, a central bank (or any other issuer) imposed conditions on who could convert their banknotes. In 1934, for instance, the U.S. ceased allowing private individuals and businesses to convert their notes into gold, limiting this feature to foreign governments and other large government-sponsored entities.
Partially-convertible systems are more convenient for issuers to maintain since they reduce the infrastructure costs involved in maintaining universal convertibility. We see this same principle applied to modern-day Exchange Traded Funds (ETFs), for instance. Although ETF units are convertible into an underlying instrument (say the S&P 500 or gold), only a few select authorized participants have permission to invoke this convertibility option. As long as these authorized participants are motivated by profits, the value of the ETF units will never diverge very far from the value of the underlying instruments. If ETF providers were required to allow everyone to redeem their units, they would have to build out and maintain the requisite infrastructure, the resulting costs pushing up fees.
Likewise, partially-convertible gold bullion standards such as the one that the U.S. ran from 1934 to 1971 could, in principal, lever the financial expertise of a few authorized participants to achieve the same fixedness to gold as a regular gold bullion standard or an old-fashioned gold coin standard, but at far less cost to society. Complicating matters in the U.S.'s case was the fact that only foreign governments could convert dollar banknotes into gold, and these governments were not as efficient as profit-minded ETF authorized participants in policing the link between gold and dollars.
There have been a number of different gold standards over the last thousand or so years. Each iteration brought with it a reduced role for the monetary metals, the resulting reduction in storage and handling costs and the diversion of gold to better uses being a net gain to society.
At the same time, even though gold has had a smaller role to play, the purchasing power of the nation's monetary units throughout this evolution continued to be tethered to the yellow metal rather than being dictated by some more arbitrary force. Put differently, from one version of the gold standard to the next, society benefited from the price stability afforded by a link to gold while being liberated from some of the metal's inconvenient physical burdens.
This blog post is a guest post on BullionStar's Blog by the renowned blogger JP Koning who will be writing about monetary economics, central banking and gold. BullionStar does not endorse or oppose the opinions presented but encourage a healthy debate.
Imagine if the world's metre sticks all grew or shrunk a bit each year. That would make for a confusing system of weights and measures, wouldn't it? Well, that is exactly what happens with money.
We have been measuring the world around us for thousands of years. Units like feet and cubits have been used for distances, pounds and kilograms to measure weight, and dollars and yen to measure economic value. Measuring value, however, is by far the most complicated of the measurements that must be taken. This is because - unlike the other units - the various items that have been used to represent dollars and yen are constantly fluctuating in value.
The British Pound, or lb
Monetary units have always been closely tied up with units of weight. For instance, the word "pound" has been used to describe both the British monetary unit (£) and the weight (lb). The pound weight was originally based on wheat. In 1266, King Henry III decreed that the British unit referred to as the grain should be defined as the weight of a corn of wheat "well dried, and gathered out of the middle of the ear." Thirty-two grains were to be equal to a pennyweight, twenty pennyweights equal to an ounce, and twelve ounces added up to a pound. So the early English pound, otherwise known as the Tower pound, was comprised of 7,680 "well-dried" grains from the middle of an ear of wheat.
The Tower pound wasn't the only pound weight used in England. The Troy pound, used for gold and silver, contained 5,760 grains, while the Merchant pound was made up of 6,750 grains. To add to the confusion, the avoirdupois pound would contain 7,000 grains.
The Exchequer Standard
Although the grain unit served as the basis for weights, people didn't go about their regular business of measuring the weights of things by counterbalancing them against tiny grains of wheat. Imagine how awkward it would be to go to the local market to ask for an ounce of meat! The butcher would have had to count out 640 grains and then counterbalance them on a scale against the hunk of meat, an arduous process that would have brought the gears of trade to a near halt. Buyers would have been constantly accusing sellers of not using appropriately dry grains, adding to the confusion.
Instead, the butcher would have owned a set of standardized metallic weights for making measurements. A customer could trust that the butcher's weights were accurate because there was a carefully-adjudicated process in place for verifying weights and measures. At the core of this process were the monarch's assayers, who had created a number of official metal weights that corresponded to an appropriate number of "well-dried" grains of wheat. These "standard weights", manufactured in 1496 under the reign of Henry VII, were safely stored at the Exchequer in London.
Using the Exchequer's standard weights as a reference, the king then created copies which were distributed to counties all across England. A county official was appointed guardian of the local copy with the job of enforcing the royal system of measurements within that county. So a local butcher who had his own set of weights would be required to have these weights periodically checked against the county official's weights. Should they pass the test, the butcher's weights would be stamped with a seal and his customers could see that they had been verified. Every few years the county official would in turn double-check that the county's copy was in accord with the standard weight by bringing it to the Exchequer for an evaluation.
An Invariant Pound
What underpinned the reliability of the pound measurement was thus the existence of a near-perfect physical representation housed in the Exchequer. As long as these standard weights were properly stored, they would stay accurate for centuries, apart from a bit of oxidation and wear & tear.
If the Exchequer's weights were destroyed, however, the system could be compromised. Which is what happened in 1834 when a fire consumed Parliament and all of the standard weights held therein. Reconstituting the standard pound weight - which by then was the Troy pound, not the Tower pound - from "well-dried" grains would have been controversial. No doubt the typical grain of wheat would have changed over the centuries thanks to selective breeding. Luckily, there was an established alternate method for measuring grains. A cubic inch of distilled water at a temperature of 62 degrees Fahrenheit, the barometer being at 30 inches, had been found to be equal to 252.458 grains, this measure allowing for a restoration of the standard pound weights.
Today, the British standard weights are housed at the National Physical Laboratory (NPL). The pound has long since lost its relevance, the UK having adopted the metric system. The NPL's most important standard weight is known as Kilogram 18, the very basis of the UK's entire mass scale. It is stored in a controlled environment in the lab's basement. The video below, made by the NPL, shows Kilogram 18 and explores the idea of defining weight by an actual physical artifact.
Although the troy pound is no longer an official measurement, the troy ounce continues to be authorized as a measuring unit for precious metals. To meet the public's need for calibrating their own weights, the NPL maintains a standard set of ounce troy weights (see pdf). The NPL's troy weight probably isn't that different from the one housed many centuries ago at the Exchequer.
The British Pound, or £
Having dealt with units of weight, let's return to monetary units. One way to create a monetary measuring stick is to have some commodity - say gold dust - serve as the standard. Under this sort of monetary standard, prices of goods and services would be set in terms of ounces of gold dust. If a horse dealer prices his horses at one ounce, for instance, then a buyer would have to pour enough gold on one end of a scale so that it counter-balanced a one-pound weight at the other end. With this measurement completed, the transaction can be consummated.
Whereas the pound weight standard was extremely stable thanks to the reference weights stored in the Exchequer, a gold-ounce monetary standard would be relatively volatile. For instance, one might imagine the horse dealer pricing his horses at 1-ounce today but 2-ounces next year—not because the horses' real value had changed, but because the value of gold dust itself had fluctuated.
Gold, after all, is subject to its own supply and demand dynamics. If a new mining technology is discovered that allows for a more efficient separation of gold from rock, thus increasing the gold supply, then the price of gold will have to fall, the price of everything else rising. It would be as if the standard pound weight sitting in the Exchequer had magically been cut in two, forcing every other weight in England to be adjusted by the same amount, the measured weights of all things (including meat) thus doubling. We would be skeptical of this sort of variable weight standard, and likewise we should be skeptical of a gold dust standard's ability to measure values. Factors unique to the gold market compromise its ability to cleanly measure value.
Gold dust is difficult to handle, each measurement taking a fair amount of time to complete. Another problem is that gold is often diluted with other materials, but only a trained expert can tell that the mixture isn't pure. We developed coinage to solve these challenges. By fusing gold or silver powder into a set of discs with discrete denominations, storing and handling was made infinitely easier. Instead of weighing the coins, they could simply be counted out at their face value. And since coins had the king's seal of authenticity, users had at least some assurance that the discs in their wallets contained unadulterated amounts of precious metals.
But the development of precious metals coinage introduced a new measuring problem: debasement. At first, the pound weight (lb) and pound monetary value (£) were perfectly aligned. Anyone could bring a pound weight of silver to the London mint and get 240 pennies in return, and because the pound sterling was officially defined as 240 pennies, one pound of silver was equivalent to £1.
In 1247, Henry III decided to coin a pound weight of silver into 242 pennies instead of 240, at which point the pound sterling and pound weight parted company. The amount of pennies cut from a pound steadily increased over the centuries so that by the mid-1500s, a pound of silver was being turned into 720 pennies. Since it takes 240 pennies to make a pound, a pound of silver was now worth £3. Put differently, the pound sterling monetary unit (and its subdivisions the shilling and penny) contained one-third the silver it originally did. So while coins might have been more convenient than gold dust, they didn't fix the measurement problem.
Debasements of the coinage were typically (though not always) undertaken by monarch as a revenue-enhancing measure, especially during wartime. When the gold and silver content of the coins was reduced, any member of the public could bring their existing full-bodied coins to the mint to be recoined into a greater quantity of coins. Until the prices of goods and services had adjusted, owners of fresh coins could buy more goods and services than people with old coins. To take advantage of momentarily cheap prices, the public flocked to the mints. Since the king or queen earned a toll on the amount of raw gold and silver passing through the mint, the debasement led to a one-time increase in their income.
Fiat Money: Either an Ideal or Awful Measuring Stick
When it comes to serving as society's measure of economic value, fiat money is both Jekyll and Hyde. By fiat money, I mean non-redeemable paper banknotes and central bank deposits of the sort that all nation's currently use. As the mild mannered Jekyll, fiat money effectively solves the mis-measurement problems described above. But as the evil Hyde, fiat money has often been history's worst monetary measuring stick.
To see the Hyde side of things, we only need to look to history. Even though gold and silver coins failed to serve as ideal measuring sticks, their rate of debasement has been relatively slow. For instance, it took three centuries for the English pound sterling to lose two-thirds of its value. The Venezuelan bolivar, meanwhile, is currently falling by that amount every few weeks. When a national government finds that its finances are deteriorating, a central bank that issues irredeemable money serves as a tempting source of funds. The printing of banknotes and key-stroking of deposits takes far less effort than a debasement of the coinage.
The Jekyll side of the story is that a well-managed fiat currency can become a perfect measure of economic value. Earlier in this post, a new mining technology led to a glut of gold on the market, driving the price of gold coins and dust down, and the prices of everything else higher. Fiat money is not a commodity, nor convertible into one, so the economy's price level can't be dictated by developments in one small and far-flung market.
To create a perfect monetary ruler, a central bank begins by compiling data on the price of an average consumer basket of goods. To keep the price of this basket constant, it satisfies all sudden increases in the demand for money that would otherwise cause the price of the basket to deflate, and reduces the supply when a fall in demand for money would otherwise cause inflation. In other words, the central bank ensures that the purchasing power of the average consumer's cash and deposit balances never varies.
So while fiat money is an improvement on gold and silver coins as a measure of economic value, it is simultaneously a retrogression. The key factors in determining whether a fiat currency will be an improvement or retrogression depends on how well it is managed by central bankers and whether the state's finances are healthy. An incompetent manager of the currency won't succeed in stabilizing the basket of consumer prices, even if the state is in fine fiscal form. If the state is desperate for funds, say because it is fighting a war, there is a good chance it will sacrifice the measuring stick function of fiat money in order to use the central bank as a financing arm of the war effort. And because central bank money is so much easier to create than commodity money, a fiat measuring stick is likely to get much more bent out of shape than a commodity-based measuring stick.
The pound weight was rock solid for centuries. It is hard to imagine that the pound sterling, whether in fiat or coin form, can ever be as stable.
Sources Carl Ricketts and John Douglas, Marks and Marking of Weights and Measures of the British Isles [source]
Norman Biggs, Coin-weights in England up to 1588 [source]
William Ashworth, Metrology and the State: Science, Revenue, and Commerce [source]
BullionStar has won Best Bullion Dealer "Rest of World" in the 2018 Bullion Directory bullion dealer Awards.
Bullion Directory is an online directory which lists over one thousand bullion dealers across the world. Each year, Bullion Directory runs its global awards competition where winners are decided by the voting public.
BullionStar secured the Bullion Directory award after being shortlisted during a first round of voting whose results were announced on 18 December last. The main vote then ran from 15 January to 23 February, with the winners announced on Friday 9 March.
The competition for the Award was strong, with bullion dealers shortlisted in the Rest of the World category being Tanaka Gold of Japan and GoldPark (Mitsubishi) of Japan, as well as Bullion India and RiddiSiddhi Bullions, both based in India. In the first round, the Rest of World category saw bullion dealers from 12 countries, such as Switzerland, Singapore, Hong Kong, Japan and India, compete to be selected in the final shortlist of five companies.
BullionStar secured 32.6% of the votes in the final round, ahead of 2nd place RiddiSiddhi Bullions of India on 28.4% of the votes. In third place was Tanaka Gold of Japan with 18.1% of the votes.
Commenting on the win, BullionStar CEO Torgny Persson said, "We’re delighted to have been voted the #1 Bullion Dealer of the Year 2018! This award bears testament to our success in breaking new ground by introducing modern technology into the age-old precious metals industry."
Mr. Persson added, "BullionStar has been growing tremendously over the last few years despite the precious industry consolidating as a whole and we’re pleased that this success has been recognized by being voted the #1 Bullion Dealer of 2018.”
On BullionStar's award achievement, Bullion Directory commented that:
"BullionStar could not be a more appropriate winner in our all-new Rest of World category, with a rapidly-growing customer base across the globe looking to buy and store precious metals in their vault."
Based in Singapore and catering to the local, global and offshore storage markets, BullionStar’s reach is phenomenal thanks to its low prices, high levels of customer care and now legendary precious metals analysis and market coverage."
Bullion Directory's Best Bullion Dealer 'Rest of the World' award is a new category for 2018. Prior to this year, the Bullion Directory awards were limited to bullion dealers based in the UK, USA, Canada, Australia and UAE, with a winner selected in each of those 5 country categories.
Next year for 2019, Bullion Directory plans to expand its coverage and split the Rest of World category into a number of distinct regional categories.
This blog post is a guest post on BullionStar's Blog by the renowned blogger JP Koning who will be writing about monetary economics, central banking and gold. BullionStar does not endorse or oppose the opinions presented but encourage a healthy debate.
Why didn't quantitative easing, which created trillions of dollars of new money, lead to a massive spike in the gold price?
The Quantity Theory of Money
The intuition that an increase in the money supply should lead to a rise in prices, including the price of gold, comes from a very old theory of money—the quantity theory of money—going back to at least the philosopher David Hume. Hume asked his readers to imagine a situation in which everyone in Great Britain suddenly had "five pounds slipt into his pocket in one night." Hume reasoned that this sudden increase in the money supply would "only serve to increase the prices of every thing, without any farther consequence."
Another way to think about the quantity theory is by reference to the famous equation of exchange, or
MV = PY
money supplyxvelocity of money over a period of time=price levelxgoods & services produced over that period
A traditional quantity theorist usually assumes that velocity, the average frequency that a banknote or deposit changes hands, is quite stable. So when M—the money supply— increases, a hot potato effect emerges. Anxious to rid themselves of their extra money balances M, people race to the stores to buy Y, goods and services, that they otherwise couldn't have afforded, quickly emptying the shelves. Retailers take these hot potatoes and in turn spend them at their wholesalers in order to restock. But as time passes, business people adjust by ratcheting up their prices so that the final outcome is a permanent increase in P.
In August 2008, before the worst of the credit crisis had broken out, the U.S Federal Reserve had $847 billion in money outstanding, or what is referred to as "monetary base"—the combination of banknotes in circulation and deposits held at the central bank. Then three successive rounds of quantitative easing were rolled out: QE1, QE2, and QE3. Six years later, monetary base finally peaked at $4.1 trillion (see chart below). QE in Europe, Japan, and the UK led to equal, if not more impressive, increases in the domestic money supply.
So again our question: if M increased so spectacularly, why not P and the price of gold along with it? Those with long memories will recall that while gold rose from $1000 to $2000 during the first two legs of QE, it collapsed back down to $1000 during the last round. That's not the performance one would expect of an asset that is commonly viewed as a hedge against excess monetary printing.
How Regular Monetary Policy Works
My claim is that even though central banks created huge amounts of monetary base via QE, the majority of this base money didn't have sufficient monetary punch to qualify it for entry into the left side of the equation of exchange, and therefore it had no effect on the price level. Put differently, QE suffered from monetary impotence.
Let's consider what makes money special. Most of the jump in base money during QE was due to a rise in deposits held at the central bank, in the U.S.'s case deposits at the Federal Reserve. These deposits are identical to other short-term forms of government debt like treasury bills except for the fact that they provide monetary services, specifically as a medium for clearing & settling payments between banks. Central banks keep the supply of deposits—and thus the quantity of monetary services available to banks—scarce.
Regular monetary policy involves shifting the supply of central bank deposits in order to hit an inflation target. When a central bank wants to loosen policy i.e. increase inflation, it engages in open market purchases. This entails buying treasury bills from banks and crediting these banks for the purchase with newly-created central bank deposits. This shot of new deposits temporarily pushes the banking system out of equilibrium: it now has more monetary services than it had previously budgeted for.
To restore equilibrium, a hot potato effect is set off. A bank that has more monetary services then it desires will try to get rid of excess bank deposits by spending them on things like bonds, stocks, or gold. But these deposits can only be passed on to other banks that themselves already have sufficient monetary services. To convince these other banks to accept deposits, the first bank will have to sell them at a slightly lower price. Put differently, it will have to pay the other banks a higher price for bonds, stocks, or gold. And these buyers will in turn only be able to offload unwanted monetary services by also marking down the value, or purchasing power, of deposits. The hot potato process only comes to a halt when deposits have lost enough purchasing power, or the price level has risen high enough, that the banking system is once again happy with the levels of deposits that the central bank has injected into the system.
What I've just described is regular monetary policy. In this scenario, open market operations are still potent. But what happens when they lose their potency?
Monetary Impotence: Death of the Hot Potato Effect
A central bank can stoke inflation by engaging in subsequent rounds of open market purchases, but at some point impotence will set in and additional purchases will have no effect on prices. When a large enough quantity of deposits has been created, the market will no longer place any value on the additional monetary services that these deposits provide. Monetary services will have become a free good, say like air—useful but without monetary value. Deposits, which up to that point were unique thanks to their valuable monetary properties, have become identical to treasury bills. Open market operations now consists of little more than a swap of one identical t-bill for another.
When this happens, subsequent open market purchases are no longer capable of pushing the banking system out of equilibrium. After all, monetary services have become a free good. There is no way that banks can have too much of them. Since an increase in the supply of deposits no longer has any effect on bank behavior, the hot potato effect can't get going—and thus open market purchases have no effect on the price level, or on gold.
This "monetary impotence" is what seems to have overtaken the various rounds of QE. While the initial increase in deposits no doubt had some effect on prices, monetary services quickly became a free good. After that point, the banking system accepted each round of newly-created deposits with a yawn rather than trying to desperately pass them off, hot potato-like.
And that's why gold didn't rise to $20,000 through successive rounds of QE. Gold does well when people find that they have too much money in their wallets or accounts, but QE failed to create the requisite "too much money".
The rapid emergence and commercialization of blockchain technology is undoubtedly one of the key technological trends at the moment, not just within crypto currencies, but as a disruptive technology across many industries and economic functions.
At a high level, a blockchain is a distributed and public digital ledger of transactions that is updated across a peer-to-peer network, and that uses cryptography to record and update the chain of blocks that make up the ledger. Within a blockchain structure, there is no central authority.
What is a Block Chain?
The essence of a decentralised blockchain network is actually explained quite simply in the introduction to the whitepaper of the world’s first implemented blockchain, Bitcoin, i.e. Sataoshi Nakamoto’s now famous Bitcoin whitepaper which was titled “Bitcoin: A Peer-to-Peer Electronic Cash System”.
In the Bitcoin peer-to-peer network, as devised by Nakamoto, network transactions are processed by cooperative nodes on the network and then stored in an ongoing chain of updates that cannot in practice be altered. The processing works by taking a number of transactions, gathering them into a block, and then hashing them, while also referencing the previous block of data.
In general, hashing refers to the process of converting a string of data into a fixed length value. The hashing function takes in the input string and outputs the hashed value. The Bitcoin protocol uses a block hashing algorithm where transactions are timestamped, with each hash output containing its own timestamp and the timestamp of the previous block. This allows the blocks to be hashed into an ongoing chain of blocks. Hence the term block chain or blockchain.
Within the Bitcoin network, the hashing is done by competing computing nodes on the network which are known as miners, and the hashing is designed so that significant mathematical effort (and CPU power) are required to produce the correct hash that will satisfy hash formatting rules, but that will also be easily identifiable as a valid block by all other nodes. The system of calculations that produce the blocks that can pass this validity check is referred to as a proof of work (PoW) system.
The mining process is therefore essentially adding new transactions to the blockchain with the inputs to the hash function being the transactions on the network which have not yet been validated or confirmed. Once a new block is accepted, all miners will switch to working on validating the next block.
Although the network is decentralised, the nodes on the network don’t need to trust each other or coordinate with each other. They can all examine the latest block created and accept its validity, therefore accepting that the longest chain is the valid chain. All the nodes or participants in the network can therefore reach consensus even though they don’t know each other and don’t communicate with each other. In the Bitcoin network, the miner which successfully solves the hash of a new block will receive an incentive for their work in the form of new bitcoins.
This continual chaining of blocks means that the resulting blockchain is irreversible and permanent, with every transaction in the history of the network being recorded in perpetuity. A properly maintained blockchain is therefore a public record that cannot be altered or tampered with.
Grasping this essential nature of a blockchain should help explain why Blockchain as a technology is variously described as a “public ledger”, a “distributed ledger”, or as a “globally decentralized public accounting ledger”. Any venture that promotes itself as using blockchain should be in some way using the technology described above or a variant of it.
The Emerging Competition to Bitcoin
Since the launch of Bitcoin nine years ago in January 2009, the blockchain technology and design concepts inherent in Bitcoin have served as the foundation for many other cryptocurrencies and blockchain innovations. There are now over 1500 exchange-traded cryptocurrencies (coins and tokens) listed on the crypto coin tracking site www.coinmarketcap.com which back these mostly blockchain ventures.
As in any competitive market, many of these coins and the companies backing them will most likely not survive over time and will disappear. However, in addition to Bitcoin (currently valued at approximately $170 billion), there are multiple coins alternative to Bitcoin (alt coins) which use block chain models, and which the ‘market’ continues to put a significant value on, based on the current trading prices of their coins /tokens and the market capitalisations of these coins / tokens.
Litecoin (currently valued at over $12 billion) used much of the same design as Bitcoin when it first released in October 2011, while introducing some coding changes such as a shorter block generation time and a different hashing algorithm.
Bitcoin Cash (valued at over $20 billion) was created on 1 August 2017 via a hard fork when the Bitcoin blockchain split into two separate chains. While the block size in Bitcoin is 1 MB, Bitcoin Cash has an increased block size of 8 MB. Bitcoin Cash allows for processing of more transactions per second than Bitcoin, which should translate into faster payments. In the short time since its launch, Bitcoin Cash has seen widespread adoption by a supportive community of developers as well as encouraging take-up by merchants and listings on many cryptocurrency exchanges. It is also supported by some high-profile names in the Bitcoin community such as Craig Wright, Roger Ver and Calvin Ayre.
Ethereum (valued at approximately $80 billion), which launched in 2015, is a distributed public blockchain system and platform that significantly extends the blockchain concepts first used in Bitcoin, and in addition to transaction processing, it also supports smart contract functionality.
Smart contracts are self-executing contracts. In technical terms, smart contracts are small software programs that live and run on a blockchain and that are replicated across the blockchain ledger. In terms of function, smart contracts are agreements which are coded so that they will only be triggered or executed when the terms of the agreement are validated. The contract logic of Ethereum smart contracts runs in a run-time environment called the Ethereum virtual machine.
The Ethereum network, co-founded by Vitalik Buterin, uses a cryptocurrency called Ether, abbreviated to ETH. Ethereum also currently uses proof of work (PoW) to prove the validity of blocks and rewards miners with ETH for processing new blocks. ETH is also used to pay for the fees levied to run Ethereum smart contracts. Ethereum will in the future move to a Proof of Stake (PoS) algorithm for awarding and allocating new blocks. Proof of Stake is based on assessing the validator’s economic stake in the platform, for example, does it hold the platform’s currency (e.g. ETH).
The Ethereum platform also supports an open source software protocol that allows software developers to build their own distributed blockchain applications or Decentralised Applications (DApps). Over 1100 DApps have already been developed using the Ethereum Platform. For example, Golem, which is a project that aims to link worldwide computers together to harness their idle processing power, is an Ethereum based DApp.
As of the time of writing, Bitcoin Cash was processing over 20,000 transactions per day. The average transaction fee on the network was 0.217 US dollars. The average time between blocks (block time) for Bitcoin Cash was 10 minutes. Similar processing statistics for Bitcoin showed that the Bitcoin network processed 215,000 transactions during the same period, with an average transaction fee of 3.04 US dollars, and a block time of 8 minutes 5 seconds. During the same time, the Ethereum network processed 835,000 transactions with an average transaction fee of 0.865 US dollars, and a block time of 15 seconds.
A relatively new blockchain platform called Cardano (currently valued at more than $9 billion) is also being valued by the market as having significant potential. Like Ethereum, Cardano is an open source decentralised public blockchain with its own cryptocurrency called ADA. The Cardano platform is also developing smart contracts and decentralised applications (DApps).
Purchase Precious Metals at BullionStar using Cryptos
BullionStar is committed to offering customers flexibility and choice when transacting on the BullionStar website and in the BullionStar shop and showroom in Singapore. As such, BullionStar facilitates the use of Bitcoin as a payment currency in addition to 6 major national currencies (Singapore Dollars, Euros, US Dollars, Japanese Yen, Australian Dollars and Swedish Krona). This ability to use Bitcoin to buy gold bars, gold coins, silver bars, and silver coins has been available to BullionStar customers since 2014.
All of the features of BullionStar's website are also fully integrated with Bitcoin. When selected from the Currency drop-down menu at the top right hand side of the BullionStar website homepage, Bitcoin becomes the default transactional currency within the website, and all product prices, spot prices, chart data, and account history will be displayed in Bitcoin. When logged into their accounts on the BullionStar website, customers can view their vault portfolios and cash balances and account history all in terms of BTC.
Benefits of Block Chain
Overall, some of the benefits of using blockchain technology include the following:
A blockchain, as long as it’s up and running, will continue to exist, so is a permanent record independent of any central authority. As its decentralized, there is no single point of failure, and the data can’t be lost because it is replicated across nodes.
Transactions that have been committed to a public blockchain are in practice irrevocable, which means that they cannot be changed, tampered with, or deleted, i.e. they are immutable.
Transactional data sent through a blockchain is encrypted and secure from interception
Blockchains, as distributed and decentralized platforms, offer dis-intermediation from often inefficient and costly intermediaries. They therefore offer efficiency improvements and cost savings compared to the frictions and costs associated with intermediaries.
Transacting currency across a decentralised blockchain between accounts, such as over the Ethereum platform, is far faster than over a centralized legacy bank transfer system.
Blockchain platforms that support smart contracts offer the potential to radically alter a whole range of industries that up until now have relied on the centralized execution of agreements and the obligations and terms of those agreements.
A public blockchain is a persistent and permanent ledger of transactions and data, accessible for anyone to see and to audit. It therefore enhances transparency, as well as hinders censorship.
Applicability of Block Chains
While the implementation of blockchain applications to the world’s industries is still in its infancy, the potential to alter existing economic systems appears far reaching, such as in financial services, real estate, legal services, government services, supply chain management, and energy markets.
For example, in the investment asset and property management sectors, ownership rights, title deeds and transactions could be recorded in blockchain ledgers, potentially altering the core processes of the asset management and property law sectors.
In the government sector, blockchain applications could be applied to electoral registers, voting records and polls, which is especially promising as blockchain data once committed can’t be altered or hacked. This would also increase transparency, trust and confidence in electoral and voting systems. Block chains also have potential to be used for digital identity and authentication functions such as passports, birth certificates, and other forms of government issued identification.
Blockchain records and transactions could also improve transparency in the world of corporate governance, providing transparent records of board level decisions and voting records.
The legal areas of intellectual property, patents, and music royalties are also strong candidates for adopting blockchain transaction and keeping records of ownership as well as the utilization of smart contracts to collect fees. Blockchains and smart contracts can also aid global supply chain management, such as tracking shipments and inventories and re-ordering supplies.
Other areas where smart contracts are seen to be beneficial include online gaming, online gambling, prediction markets, the sharing economy such as ride sharing and accommodation sharing, the trading of computer processing power, decentralized data storage, and decentralized securities exchanges. Overall, smart contracts are in theory applicable to anything that can be programmed, which covers a wide range of agreements and documentation in nearly every industry around the globe.
Chinese New Year is probably the most important date in the Chinese calendar, with the event being celebrated throughout China and in Chinese communities around the world. Gold plays an essential part of the Chinese New Year celebrations.
Also known as Lunar New Year, the date on which Chinese New Year falls each year is variable since it follows the Lunisolar calendar, hence the New Year festival is a movable event. However, Chinese New Year usually falls somewhere between 21 January and 21 February and the date is calculated based on the occurrence of a new moon.
This year, Chinese New Year is on Friday 16 February and marks the beginning of ‘Year of the Dog’ and the completion of the preceding ‘Year of the Rooster’. The Chinese calendar follows a 12-year repeating cycle and is also associated with 12 animals of the Zodiac (Sheng Xiao), with each year in the cycle represented by a different animal. The Year of the Dog is the 11th year in the Zodiac cycle. Next year in 2019, Chinese New Year falls on 5 February, and marks the beginning of the 'Year of the Pig', the final year of the cycle.
People born in the upcoming Year of the Dog are said to be loyal, honest and friendly with a sense of responsibility as well as being intelligent, independent and decisive. And across China, dogs are also considered auspicious and associated with good fortune.
New Year's Day in China also marks the beginning of the Spring Festival. During Spring Festival, there is a 7 day public holiday across mainland China, beginning on Lunar New Year’s Eve and ending on the 6th day of the new lunar year. This year, the New Year public holiday starts on 15 February and lasts until 21 February. The actual Spring Festival then continues and runs up to the 15th day of the new lunar month which coincides with the traditional Lantern Festival. This year the Lantern Festival is on Friday 2 March.
Customs and Traditions across the Spring Festival
Chinese New Year celebrations are predominantly associated with the colour red. Red is traditionally thought to bring good luck and good future while scaring away evil and bad fortune. This tradition is associated with the story of a mythological beast Nian which in Chinese folklore was scared off by the use of red items and loud noises. Hence New Year’s celebrations incorporate red bunting, red hanging lanterns, dragon dances and loud displays of fire crackers, and its also common in China to see red cloths hanging at the entrances to houses during New Year’s festivities. Wearing red clothes is also popular over the festival and is thought to bring good luck.
In China, the New Year festivities incorporate various customs and traditions symbolising the renewal of a new year, the passing of an old year, and the cultivation of good luck. In the week before New Year, people traditionally clean their houses as a way of cleaning out the old. New Year is also a popular time to purchase new items as it signifies a new beginning and the welcoming of a new year.
The gifting of money-filled red envelopes is also popular during New Year across China. These gifts are thought to bring good luck to the recipient, hence they are known as lucky red envelopes. An amount containing the number 8 is particularly auspicious as the number 8 is thought to be lucky and bring prosperity. But apart from the money, the red colour of the envelope is also associated with good fortune.
The days leading up to New Year are a time of immense travel within China with millions of people on the move as they return home to their families and relatives to celebrate. A particularly important event during this time is the traditional ‘Reunion Dinner’ which takes place on New Year's Eve, and is a traditional dinner celebrated together with family.
Gift Giving for Chinese New Year
Chinese New Year is also one of the most popular times in China for buying physical gold, gold for gift giving, but also for investment given that it's an auspicious time of the year. At the retail level, Chinese gold demand at this time of year sees a noticeable peak as people across China rush to buy gold bars and buy gold coins, especially for gifting.
This is particularly true of gold coins and gold bars with a Lunar New Year theme, a Zodiac animal theme, or that have an association with China. At BullionStar, we have a wide selection of gold coins and gold bars which would make impressive gifts for Chinese New Year for both family and friends.
PAMP Lunar Series 2018 Year of the Dog Gold Bars
Swiss gold refinery PAMP is one of the best known and most prestigious gold bar brands on the market and is especially popular across Asia. This year PAMP celebrates the 'Year of the Dog' with a beautifully designed high relief gold bar portraying a dog motif on both the front and the reverse of the bar's surface. These Lunar gold bars are ideal for gifting and for celebrating the good fortune associated with Chinese New Year.
Available in both 100 gram and 1 ounce weights, PAMP's Lunar minted gold bars contain .9999 pure gold and capture the dog's symbolic qualities of loyalty and friendship. The intricate design on the front face features a portrait of an adult dog sitting in front of a kennel. The reverse of each Lunar gold bar cleverly reveals, through a reverse angle of the same scene, a puppy in the kennel sheltered behind the parent dog.
The bars reverse face is also embossed with PAMP’s refinery logo, the weight and purity of the bar, the bar’s unique serial number, and the Swiss assay mark and guarantee of authenticity Essayeur Fondeur.
Royal Canadian Mint MapleGram 8
The MapleGram 8 from the Royal Canadian Mint is a particularly stylish set of 8 Maple Leaf gold coins presented within an attractive red and gold display card and designed around a Chinese New Year theme. Each of the 8 gold Maple Leaf coins weighs 1 gram and contains 9999 fine gold. Each of the 8 coins in the set also has its own unique 8 digit serial number. The red and gold design of the MapleGram 8 signifies luck and good fortune, while the presence of 8 coins references the auspiciousness of the number 8 in Chinese culture.
Perth Mint Gold Lunar 2018 - Year of the Dog
Another attractive gift option for Chinese New Year are the very popular Lunar themed bullion coins from Australia’s Perth Mint, which for 2018 celebrate the Year of the Dog. These coins are the 11th in the Perth Mint’s current series of Lunar bullion coins.
The Perth Mint’s 2018 Gold Lunar coin is available in 6 weight denominations, namely 2 oz, 1 oz, 0.5 oz, 0.25 oz, 0.1 oz and 0.005 oz, each of which is minted from 0.9999 fine gold. The 1 oz 2018 Gold Lunar has a maximum mintage of 30,000 pieces. The reverse of the Lunar gold coin features a stylish and detailed image of a Labrador Retriever with the Chinese character for "Dog", and "Year of the Dog" is a circular inscription underneath.
Perth Mint Lunar Silver 2018 - Year of the Dog
Also in celebration of Chinese New Year, the Perth Mint has produced a 2018 'Year of the Dog' Silver Lunar coin available in weight denominations of 0.5 oz, 1 oz, 2 oz, 5 oz, 10 oz, and 1 kg, all of which contains 99.99% silver and have a superior finish. The reverse of the 2018 Silver lunar celebrates the new Zodiac with a handsome portrayal of a German Shepherd dog and pup. The coin also displays the Chinese character for "Dog", with a circular inscription underneath of "Year of the Dog". While gold is more popular for gifting at New Year in China, silver coins, especially the bigger ones such as the 1 kg Silver Lunar for 2018, can also be gifted.
In terms of gold bullion and China, Chinese Panda gold coins are undoubtedly the most famous Chinese gold product on the international market, and would make interesting gift ideas for Chinese New Year. Minted in China by Shenzhen Guobao Mint, this Mint is part of China Gold Coin Corporation, which in turn is owned by the Chinese State.
Each year the design on Chinese Gold Panda coins changes, with the reverse of the new 2018 coin featuring a powerful portrait of a Giant Panda feeding on a bamboo shoot. The front of each Gold Panda coin features imagery of the Hall of Prayer for Abundant Harvests in the Temple of Heaven in Beijing.
Gold Panda coins are produced in 5 weight denominations ranging from the flagship 30 gram Gold Panda coin, through to Gold Panda coins weighing 15 grams, 8 grams, 3 grams and down to a 1 gram gold coin. The 30 gram Gold Panda coin, weighing the equivalent of 0.965 troy ounces, is always a popular seller and would make a New Year’s gift to remember. Given that 8 is the luckiest number in China and is associated with prosperity and good fortune, the 8 gram Gold Panda coin is also of interest during the New Year festival.
Heraeus 1 kg Silver Lunar Stacker Bar
The Year of the Dog is also celebrated in a new 1 kg Silver Lunar Stacker Bar from the world-famous Heraeus precious metal refinery in Germany. Each of these 1 kg (32.15 ozs) Heraeus Silver Lunar bars contains 99.9% pure silver and has the words “2018 Year of the Dog” embossed on the bar's front surface along with the bar's weight and fineness “1 Kilo” and “999 FINE SILVER” which encircles a stylised representation of a dog.
The reverse of each of these silver bars features an anti-forgery swirl pattern design for added security, and displays the bar's unique serial number. The Heraeus Silver Stacker bar is designed for easy storage and comprises rectangular beveled surfaces that interlock for ease of stacking.
1 oz Silver Happy Chinese New Year - Lion Dance
Also of interest for Chinese New Year is a 1 oz proof silver “Happy Chinese New Year - Lion Dance” coin produced by Victoria Mint on behalf of the Republic of Chad. The silver coin’s reverse features a colorized depiction of a traditional Chinese Lion dance which is synonymous with good luck and fortune, and the Chinese characters ‘新年快樂’ meaning ‘Happy New Year’. This proof silver coin has been produced by the Mint in a very limited issue of just 1000 coins. Each coin comes with a certificate of authenticity and is presented in a red velvet casing and outer box.
As market turmoil hits both equities and cryptocurrencies, the heightened volatility in these assets underscores gold’s unique role as a safe haven, store of value and portfolio diversifier.
Stock Market Selloffs
With major US stock indices falling again sharply on Thursday (DJIA - 4.02%, NASDAQ - 4.08%, S&P -3.41%), last Monday’s equity market selloff and spike in volatility looks set to be a more prolonged affair than a one-off plunge and recovery. The Dow’s Thursday close of 23860 is 2756 points, or 10.3% lower, than the all time high of 26616 from 26 January, and the Dow is now officially in correction territory. This week also saw two records added to the history of stock market selloffs, Monday’s biggest ever points drop in the Dow, and Thursday’s second biggest ever Dow points drop.
Similarly the S&P 500 index closed on Thursday at 2581 and is now 292 points, or 10.1% lower than its all-time high of 2,872.87 from 26 January, again in correction territory.
The NASDAQ composite, which also reached its all-time high of 7505 on 26 January, is virtually in a 10% correction zone below 6755, as it closed just a few points over this level at 6777 on Thursday.
Finally, the CBOE Volatility Index (VIX), the widely used measure of stock market volatility - which is also known as the investor fear gauge - had spiked up massively late Monday and into Tuesday to the 35-40 range, and critically was again seen approaching those levels at Wall Street market close Thursday.
Equity market indexes across the globe, as normal taking their cue from Wall Street trading, have also been falling in tandem, with markets in Europe, Asia and the Americas all lower on the week.
Whatever the reasons for the shift change in market sentiment, from macro factors to algorithmic trading, these abrupt index plunges and the rise in volatility have spooked investors across the globe and have led to panic selling and active profit-taking. With a low volatility environment less certain than before, market consensus on ever-increasing stock prices may be beginning to unravel.
Clouds over Cryptocurrencies
In cryptocurrency markets, the price euphoria seen in December and early January led by Bitcoin and some other large alt coin rivals has also given way to deep corrections and unclear price direction.
Until earlier this week when Bitcoin rallied back to above $8000 from below $6000, Bitcoin’s price had been on a consistent downward trajectory for nearly a month. From its intermediate high of US $17,000 on 7 January, in less than 30 days, the price had collapsed to below US $ 6,000, an approximate 65% drop. From the ultimate high of just over $20,000 on 17 December to the recent low of below $6000, Bitcoin’s price collapse exceeded 70%. Similar price movements were seen across the board in other crypto coin prices, both large and small cap.
Coupled with Bitcoin’s equally sharp price gains in late 2017, the short-term price movements of Bitcoin, both up and down, are hugely volatile. As recently as a year ago in early February 2017, Bitcoin in US dollars was still trading in the $1000 range. It was only in May 2017 when the price first breached the $2000 mark and August when it initially hit the $3000 range. As its meteoric rise continued, by late October the price had again doubled to $6000, and it was just mid-November 2017 (less than 3 months ago) when the Bitcoin price first traded in the $8000 range, a similar price range to where it now finds itself back at now.
Mid-November is also arguably the point at which Bitcoin’s dizzying ascent really got going, shooting up to over $11,000 before the end of November. It was at this point that hundreds of smaller alt coin prices started to really explode upwards also, taking the broad cryptocurrency market and the overall sector MarketCap much higher. Within a week between 1 December and 8 December, the Bitcoin price had again exploded to over $18,000, and the ultimate peak of $20,000 was reached less than 10 days later on 17 December.
After this, a series of lower highs and lower lows saw the Bitcoin price oscillate wildly in the $12,000 - $18,000 range before its prolonged fall from 7 January onwards to below $6000 on Tuesday 6 February, and its subsequent bounce to $8000. This high price volatility must raise the question of Bitcoin as store of value, and to what extent it is primarily a payment system versus a dependable store of value.
Gold's Attraction in Market Turmoil
Investors in financial and other asset markets prefer predictability and stability. Hence investor apprehension at the growing uncertainty and heightened volatility in global stock markets and the recent pump and dump chart patterns of many cryptocurrencies.
But it is during market turmoil that gold’s safe haven qualities come to the fore. Since gold has no counterparty or default risk it is a universally known and universally used safe haven for preserving wealth during market crises. Gold's high liquidity also adds to its safe haven appeal. During financial market turmoil, gold's price therefore generally reflects this movement out of risk assets and into the safe harbour that gold provides. The below chart plots a relatively comparison between the US dollar price of gold and the S&P 500 index, over the week beginning Monday 5 February, showing gold's outperformance as the US stock market suffered a series of selloffs.
Gold is also one of the traditional and best-known stores of value, some others being land and property. A reliable store of value asset will allow you to park your wealth and retrieve it at a later time knowing that it will still have value and will have retained the value that it had when you converted some of your savings or wealth into that asset. A reliable store of value will also adjust for inflation and retain its purchasing power relative to inflation. Physical gold in the form of gold bars and gold coins does just that and retains its purchasing power over long periods of time precisely because the gold price, as an inflation barometer, adjusts to reflect expected inflation.
Finally, gold can also reduce the volatility of a portfolio of investment assets such as stocks and bonds. By adding an investment in gold, the resultant portfolio displays less volatility of returns, and can also exhibit higher expected returns. This is due to the gold price having a low to negative correlation with the prices of securities such as stocks and bonds.
This blog post is a guest post on BullionStar's Blog by the renowned blogger JP Koning who will be writing about monetary economics, central banking and gold. BullionStar does not endorse or oppose the opinions presented but encourage a healthy debate.
Would it make sense to rebuild an international gold standard like the one we had in the late 1800s? Larry White says the idea has merit, David Glasner believes it isn't worth the risk. Over the years I've followed the back-and-forth between these two blogging economists, each of whom has done an admirable job defending their respective side for and against the gold standard. Let's look at one or two of the most important themes running through the White v Glasner debate.
Like a ruler measures distances, a nation's monetary standard serves as a measuring stick for the value of goods and services. People need to be able to set sticker prices with the unit, calculate profit and loss, negotiate labour contracts, and establish the terms of long-term debts using it. If the measuring stick is faulty, then all these important tasks becomes unnecessarily difficult.
Gold as Unit of Account
Since 1971 our measuring stick has been irredeemable paper currency, or a fiat money standard. Central banks try to ensure that, within the confines of their nation, the general level of domestic consumer prices stays constant, or at least rises at a constant rate of around 2-3%. And while the first decade of the fiat standard was a disaster characterized by high and rising inflation, central bankers in developed nations have generally managed to keep inflation on track for the last thirty or so years.
To re-establish gold as the measuring stick, each nation's unit of account—say the $ or ￥ or £—would have to be redefined as a certain fixed number of ounces of gold. Banknotes and central bank deposits, which are currently inconvertible, would be made convertible into an appropriate amount of gold. It is important that all nations return to the gold standard rather than just one, because one of the big advantages of an international gold standard is that with all currencies pegged to gold, it is much simpler for citizens of one nation to make calculations using another nation's unit. And this makes cross-border trade and investment easier to engage in.
Should banknotes and electronic fiat currency once again be made convertible into gold?
In Favour of the Gold Standard: Larry White
How well have the two standards served as measuring sticks? As the chart below illustrates, year-to-year changes in U.S. consumer prices were quite variable during the classical gold standard era, rising some years and falling the next. The source for this chart is from this paper that White has coauthored with George Selgin and William Lastrapes. The classical gold standard from which the authors draws their data lasted from 1880—when the majority of the world's major nations defined their currency in terms of the gold—to 1914 when the gold standard was dismantled on the eve of World War I. Data shows that the fiat standard that has been in place since 1971 demonstrates more predictable year-to-year price changes. Citizens of developed nations are pretty safe assuming that next year, domestic prices will rise by 2-3%.
However, it is over longer periods of time that gold outperforms as a measuring stick. In the chart below, the authors show that the quarterly price level during the gold standard tended to deviate much less from its six-year average rate than during the fiat era. Because the general level of prices was more predictable under a gold standard, this provided those who needed to construct long-term debt contracts with a degree of certainty about where prices might be in ten or twenty years that is lacking under a fiat standard. White points out that this may be why 100-year bonds were common in the 1800s, but not so much now.
According to White, the main reason for the long-term stability of gold is the tendency for higher prices to encourage gold miners to increase the supply of metal, thus tamping down on the price, and conversely lower prices to encourage them to reduce production, thus buoying prices. In other words, prices under a gold standard were mean reverting. This mean reversion was generated "impersonally", or automatically, by the market, a superior sort of stability compared to that generated by a fiat standard, which depends on the skills and wherewithal of technocrats employed by the central bank.
Against the Gold Standard: David Glasner
David Glasner is skeptical about the gold standard because he doesn't agree that it mean-reverts fast enough. All of the gold ounces that have ever been mined continue to exist in vaults or under mattresses or around necks. Compared to this extant gold stock, the flow of new gold production is tiny. So if there is an increase in people's demand for gold, it is unlikely that new flows will be able to satisfy it, at least not for some period of time. Likewise, reduced gold production on the part of gold miners won't be able to vacuum up enough of the slack should people suddenly want less of the stuff. In either case, the price of gold will have accommodate shifts in demand by rising or falling quite a bit.
One thing that most monetary economists agree on is that fluctuations in the value of the item used as the standard—gold or fiat money—should not interfere with the "real" economy, say by causing unemployment or gluts of unsold goods. While many prices in an economy are incredibly flexible, like the price of stocks or gold or bitcoin, there are also many prices that are sticky, in particular labour. Under a gold standard, if there is a sudden increase in the demand to hoard gold, then there will be pressure on price of gold to rise. The rise in the gold price means that the general level of prices must fall. Goods and services, after all, are priced in terms of gold-backed notes. But with wages and many other prices locked in place, the response on the part of employers will be to adjust by announcing mass layoffs. Rather than cutting the sticker prices of goods, retailers will suffer though gluts of unsold inventory. This is a recession.
Glasner's favorite example of this occurred during the late 1920s. After WWI had ended, most nations attempted to restore the pre-war gold standard with banknotes once again being redeemable with fixed amounts of gold. But then the Bank of France, France's central bank, began to buy up huge quantities of gold in 1926, driving the gold price up. The U.S. Federal Reserve was unwilling to counterbalance what was viewed as insane purchases by the Bank of France, the result being the worst recession on record, the Great Depression.
What Type of Gold Standard?
Given that various commodity standards have been in place for centuries, why did it take till 1929 for a massive monetary mistake to finally occur? White blames this on large government actors, specifically central banks. In the initial international gold standard that ran from 1880-1914, nations such as Canada, Australia, and the U.S. didn't have central banks. Commercial banks in these nations chose to link their privately-issued banknotes to gold, the goal of these competing banks being to to earn profit rather than enact social policies. So earlier versions of the gold standard functioned far more naturally, without the meddling of large actors who refused to abide by the typical rules of a gold standard. It is for this reasons that White prefers that any return to the gold standard be packaged with an end to central banks, thus precluding episodes like the Great Depression from occurring.
David Glasner remains skeptical. According to Glasner, even the classical gold standard that ran from 1880 to 1914 required management, the Bank of England leaning in such a way as to counterbalance large demands for gold from other central banks and thus preventing anything like the Great Depression from occurring. And even if central banks were to be dismantled under a 21st century version of the gold standard so as to preclude an "insane" Bank of France scenario, there remains the problem of "panic buying" of gold by the public—and the resulting gold-driven recession this would cause.
So Where does that Leave us?
As I hope you can see by a quick exploration of the debate between Larry White and David Glasner, restoration of the gold standard is a complicated issue. I'd encourage readers who are interested to dive a bit deeper into the subject by reading David's posts here and Larry's here.
As for myself, White's work on the 1880-1914 gold standard has been helpful in removing many of the preconceptions I had of the gold standard, no doubt passed off to me by commentators who were never very familiar with the actual data. Nevertheless, I tend to agree with Glasner that under a global gold standard (with no central banks) a sudden spike in the public's demand for gold would impose large costs on the global economy. With citizens of the globe being so connected through the internet and free capital markets, these sorts of episodes might be more common nowadays than they were in the 1800s. I'm not sure the benefits of a gold standard, including exchange rate stability, make up for this risk. Given that Western central banks have done a fairly decent job of keeping inflation under control for the last thirty or so years, I'll give them the benefit of the doubt... for now.
The traditional phrase “worth your weight in gold” has been used since Roman times, and is a well-known saying signifying that someone or something is very valuable, helpful, or to be treasured.
But taken literally, what ‘value’ would a person be worth if they were worth their own weight in gold?
For a given gold price, the answer not surprisingly depends on the person’s weight, so a more suitable and relevant question might be what value would an average person be worth if they were worth their weight in gold?
Since average weight will vary by gender, a practical calculation would be to run two calculations, one for the average weight of a woman, and the other for the average weight of a man.
Looking at average weight data over regions of the world by male and female yields an average weight for a man of 78.5 kgs (173 lbs), and an average weight for a woman of 69 kgs (152 lbs).
Across the world, human weight data shows the regional averages for both genders from heaviest to lightest run as follows: North America, Oceania, Europe, Latin America, Asia, Africa. Taking simple averages of these regions for men and women, the average global weight for a man is 78.5 kgs (173 lbs), while the average weight for a woman is 69 kgs (152 lbs).
At a gold price of US $1350, a world average weight of 78.5 kgs (173 lbs) for a man would mean that the average adult male would weigh approximately 1993 troy ounces, and be valued at approximately US $ 3.4 million. Note that 1 kilo = 32.1507 troy ounces.
32.1507 troy ounces * 78.5 kgs = 2524 ozs = US $3.40 million
At the same gold price, a world average weight of 69 kgs (152 lbs) for a woman would mean that the average adult female would weigh approximately 2218 troy ounces, and would be valued at approximately US $3 million.
32.1507 troy ounces * 69 kgs = 2218 ozs = US $2.99 million
Overall, an average adult across the world weighs 2371 ozs, which at a gold price of US $1350 would be valued at US$3.2 million.
Most people will be familiar with the large gold bars that are stored in central bank gold vaults, such as the gold vaults of the Bank of England in London. These ‘Good Delivery’ gold bars are standard bars in the worldwide wholesale gold market, and although they are variable weight bars, each of these gold bars usually weighs in the region of 400 ozs. Assuming one of these gold bars weighs 400 ozs, then the average adult in our global weight calculation would weigh the equivalent of 5.92 good delivery bars. Let’s call it 6 Good Delivery gold bars, which would be a neat pyramid of 3 * 2 * 1 gold bars.
Similarly, when measured in terms of gold kilobars, the average adult from our calculation would weigh the equivalent of 74 gold kilobars.
Gold's High Density
Density refers to the amount of mass (weight) in a given volume. Gold has a very high density, 19.3 g/cm3, which is higher than most other metals. As an example, a cubic centimetre of gold will weigh 19.3 grams. Gold’s density is also 19 times higher than water, which is why gold panning works, since the gold will sink to the bottom of the pan and separate from other materials.
Gold's high density also explains why even a 1 ounce gold bar or 1 ounce gold coin will feel heavy when held in the hand, especially for people holding one of these gold bars or gold coin for the first time. It also explains why trying to lift up a 400 oz gold bar, especially with one hand, is a lot more challenging than it first looks.
Gold’s high density also means that a significant amount of gold can be stored in a small area. And because a small amount of gold is valuable, this also means that a very high value holding of gold can be stored in a small area.
This can be referred to as gold’s value dense property, i.e. a small quantity has a high value. This also means that gold can be hidden easily. And that a small amount of gold worth a significant amount can be carried easily, i.e. gold is portable.
Gold's high density makes it difficult to counterfeit, since few other metals can be substituted for gold as their densities are lower. One exception is the metal tungsten, which has a density of about 19.3 g/cm3, similar to gold. While tungsten is sometimes associated with gold bar forgeries, nowadays there are various tests and measurement apparatuses which can determine that a counterfeit bar contains tungsten and not gold.
In comparison to gold, silver has a density of 10.5, which explains why silver is bulkier and takes up more room to store. As the silver price is about 80 times less than the gold price, it also means that a high value holding of silver will require substantially more room to store than a gold holding of the same value. This also explains why silver storage fees in a vault are higher than gold storage fees.
The Gold Standard
Apart from the phrase “your weight in gold”, there are many other well-known idioms associated with gold which also convey gold’s high value and the esteem with which societies and civilizations have held gold in throughout history.
For example, as well as describing an actual gold standard where gold-backed paper currencies in many parts of the world up to the 20th century, the phrase “gold standard” is used metaphorically describe a standard of excellence by which other things are measured.
“Like gold dust” is a popular idiom signifying that something is very rare and of high value, and which is difficult to find because of its rarity value. This expression is derived directly from the fact that gold too is difficult to find, is rare and is of high value.
If a business or enterprise is referred to as “a gold mine”, it is because that business generates substantial profits or cash flow for the owners. Similarly, if someone is “sitting on a gold mine”, it means that they have land or property which is worth a considerable amount.
The terms ‘golden handshake’ and ‘golden parachute’ are now used widely in business to refer to generous departure terms when employees or executives leave a position of employment.
A “gold rush” is often synonymous with the frenzied pursuit of an investment opportunity or new investment sector, such as a gold rush on Wall Street, or the dot-com gold rush. Finally, to “strike gold’ is to find success or wealth through a deliberate endeavor or sometimes through luck.
Whatever the expression, the one thing that these well-known phrases have in common is that they allude to gold's high value and rarity, and are immediately accepted and understood when used in the English language.
People often refer to bitcoin as digital gold because of the similarities between the two assets. One big difference between gold and bitcoin is currently playing out in their respective futures markets. Since bitcoin futures were introduced last December by the CBOE, futures prices have often been inverted, or in backwardation. This sort of phenomenon rarely happens in gold markets, which trade normally, or in contango. Let's explore why inversion seems to be relatively common with bitcoin and whether this will continue to be the case in the future.
Backwardation or inversion is when future prices for a commodity lie below its current price. For instance, at lunch-time on January 16 (EST), when the current price for bitcoin was $12,170 on the Gemini bitcoin exchange, the March 2018 contract on the CBOE futures exchange was being bid at $12,000, a discount-to-spot of $170 or 1.4%.
At that very same point in time on January 16, gold's spot price was at $1334 whereas the March futures contract was trading at $1336.90, a premium-to-spot of $2.90 or 0.2%. This is contango, or a normal-yielding market. I’ve illustrated both markets below.
In theory, the future price of a durable and easily storable commodity—say like gold, silver, and bitcoin—should always lie above the current price, or in contango. This is because storables incur holding costs, and a higher futures price is the market's way of paying for those costs.
Contango as the fee for hoarding gold
To see how this works, let's trek through an example. Say that you are jeweler. It is January and gold is trading at $1300/ounce, which you think is a fantastically cheap price. However, you can't take possession of the gold right now because you have no space for it—your vault is already full. Three months from now, at the end of March, your existing inventory will have run down and you'll have room for the stuff. Can you lock in today's price while having someone else hold the metal for you until then? Say you strike a deal with a counterparty. They will buy the gold at today's price of $1300 and store it in their vaults on your behalf, only delivering the stuff to you at the end of March.
Your counterparty won't provide this service for free, they have to be compensated for the burdens of carrying the product for you. These costs include the interest payments on the loan required to buy the gold, vaulting fees, and insurance. So if gold is currently trading at $1300, and the total cost of carrying it till March is $10/ounce, then the contract you strike with the counterparty will be priced at $1310. Of this amount, $1300 allows the counterparty to pay off the face value of the loan they originally took out to buy an ounce of the yellow metal, the remaining $10 covers them for the cost of storing it, insuring it, and paying interest.
With the futures contract trading at $1310 and the current price at $1300, we say that the market is in contango. Contango is the fee—in this case $10—that buyers of gold-in-the-future pay to counterparties in order to induce these counterparties to hoard the metal on their behalf for a period of time.
As the chart below shows, gold has spent most of the last ten years in contango. The spread, or difference between the spot price and the futures price (from 2 months out to 20 months out) almost always lies above 0%.
There have been two exceptions on the two and four-month spread (the red and pink lines), one in 2014 and another in 2016. I described the 2014 episode here. But inversions like these will only ever be fleeting, the dominant pattern in gold markets being a normal market characterized by futures prices trading above spot prices. (If you want to get into the specifics of the relationship between gold spot and future prices, Koos Jansen has written an in depth treatment here).
Backwardation as a negative fee
Compared to other commodities, gold compresses a lot of value into a small amount of space. Which means it is relatively cheap to store. For instance, ten bushels of wheat—which is worth around $40—would require an entire closet as storage space. To store $40 worth of value in the form of gold, a gram would be sufficient for the task. If we look at the data, with gold trading at $1334 and the March contract was $1336.90, the cost of storing gold in a vault, insuring it, and financing it until March is just $2.90.
Bitcoin's $170 backwardation on January 16 meant the opposite. Counterparties who were offering to store bitcoin through to March were so desperate to provide this service that they were willing to pay a fee to do it rather than charging a fee. That anyone would take on the task of storing bitcoins for free, let alone paying to take on the burden, is especially odd given that the cost of securely "hodling" bitcoin is probably not that much less than storing gold. Commercial storage of bitcoin involves depositing private keys in vaults, much like how people keep the yellow metal safe. Consider this recent Times article that describes how the Winklevoss twins, who own a big bitcoin stake, have cut up printouts of their keys and scattered the pieces in safes all around the U.S., so if one safe is broken into the thief would still lack the full key. It is difficult to find insurers that offer bitcoin insurance products, this rarity presumably translating into fairly high insurance costs. And like gold, the financing necessary for purchasing bitcoin incurs interest expenses. So in theory, the price of bitcoin in March should permanently lies a hundred or so dollars above the spot price in order to cover these carrying costs, not below the spot price.
There are two theories for why bitcoin might be spending a disproportionate amount of time in backwardation.
1. Undeveloped market for short-selling
Imagine that a crowd of large Wall Street traders suddenly want to sell bitcoins short, but they can't because their stringent investment mandates prohibit physical bitcoin positions. So they express their short bias by selling CBOE futures contracts which—because they are listed on a legitimate exchange—do not contravene these traders' mandates. Bitcoin futures, which had been in contango, are abruptly driven into backwardation, a discount-to-spot.
Normally an arbitrageur would correct this discrepancy. If an arbitrageur is holding some bitcoins, the $170 discount means that the market is rewarding her not to store those bitcoins. She purchases futures at $12,000 and sells some of her bitcoins at $12,170, earning a risk free $170 profit. As long as this backwardation continues, she can keep earning profits by selling her bitcoins and buying futures until she has run out of bitcoins to sell. At which point she will try to borrow bitcoins from other people and sell them. The combined effect of her constant selling of physical bitcoins and futures buying should eventually drive the market price from its inverted state back into contango.
But if our arbitrageur can't borrow enough bitcoin to counterbalance Wall Street's demand to sell bitcoin short, say because lending markets are still undeveloped, then there is no way for her to fix the anomaly. Markets are stuck in backwardation. Both Kid Dynamite and Jayanth Varma have posts explaining the difficulties of arbitraging bitcoin in more detail.
An undeveloped market for borrowing and lending bitcoins is not innate to bitcoin. Presumably if bitcoin markets develop, these sorts of inefficiencies will be addressed and bitcoin—like gold—will trade more normally. That being said, bitcoin does have one innate property that can lead to backwardation: forks.
2. The omnipresent threat of forks
The second explanation for bitcoin backwardation is the ever-present threat of contentious forks.
To help understand how forks affect bitcoin futures prices let's first look at how S&P 500 futures work, because there is an important similarity between the two assets. While storing gold is a drag, there is an upside to storing the S&P 500. The person who does the storing gets to enjoy dividend payments! As long as dividend payments are higher than the cost of paying interest on the loan originally used to buy the S&P 500 (there is no vaulting or insurance costs on equities), then it is possible to come out a net winner by carrying the S&P 500 through time.
Over the last ten years or so, S&P 500 futures have generally been inverted, with futures prices trading below spot prices. The reason for this is that short-term interest rates have generally been lower than dividend yields. Those who store equities through time on behalf of buyers of S&P 500 futures accept a discount-to-spot because the dividends they earn make up for it.
Although bitcoin doesn't pay dividends, it does throw off an unusual set of rewards—forks. When a fork occurs, anyone who held x bitcoins now gets x newcoins in addition to their existing x bitcoins. Forks occur because participants in the Bitcoin network disagree about certain technical features of the code that runs the network. One set of actors continues to use the original code while the other modifies it, this modification leading to the creation of newcoins.
A futures market like the CBOE must define what sort of bitcoins are sufficient to settle a bitcoin futures contract. In the case of a chain split, this gets complicated. Is someone who owns a futures contract entitled to get just 1 bitcoin from the seller of a futures contract, or are the entitled to 1 bitcoin and 1 newcoin? The short answer is that the CBOE defines a 'bitcoin' in such a way that it does not include newcoin. So in the event of a fork, a futures seller who is storing a bitcoin in order to deliver it to a futures buyer gets to keep the newcoins for free.
Any newcoin that is created will hive off or steal a chunk of bitcoin's original value—after all, you can't get something for nothing. Thus, in the event of a fork, those who have bought a futures contract are now entitled to an inferior bitcoin, one that has had the value of a newcoin ripped out of it. Conversely, anyone who has been storing bitcoin on behalf of someone else no longer needs to deliver the full bitcoin when the futures contract expires; the terms of the futures contract stipulate that they get to retain a chunk of the original bitcoin in the form of a newcoin.
So to protect themselves against the potential for lost newcoins, those buying bitcoin futures will always demand a lower futures price than they would otherwise demand in a world in which bitcoin could not be forked. If the threat of a fork is deemed large enough, bitcoin futures will actually go into backwardation.
Think of it this way. Backwardation means that those storing bitcoin on behalf of others will not only do so for free, but will even pay to have the task thrust on them. This may sound odd, but if part of the calculus of storing bitcoins is that all free and valuable newcoins can be retained by the person who does the storing, then it makes sense that people will eagerly pay a fee for the right to store someone else's bitcoins.
An example: backwardation and the failed Segwit2x fork
We can see an example of a fork-induced backwardation happening back in the fall of 2017, when a proposed change to Bitcoin's source code called Segwit2x was on the verge of leading to the creation of a newcoin. Bitmex, a fledgling futures exchange, stressed to its users at the time that its December 2017 bitcoin futures contract would not include the Segwit2x newcoin.
Through late October and early November, Bitmex's December futures contract fell to an ever deeper discount relative to the spot price of bitcoin. You can see this in the chart below. This inversion occurred in conjunction with growing odds that the upcoming newcoin's debut would be a success and that it would 'steal' quite a bit of value from each already-existing bitcoin. A futures buyer who wanted to take delivery of one bitcoin in December 2017 needed to adjust for the fact that this bitcoin could have a large chunk ripped out of it by Segwit2x. Driving Bitmex's futures contract into backwardation was the market's way of making this adjustment.
The Segwit2x fork was abruptly cancelled on November 8, and Bitmex's December 2017 contracts immediately reverted to contango. Since the cancellation of Segwit2x meant that existing bitcoins would not have any value sucked out of them, there was no need for futures buyers to protect themselves.
To sum up...
Because bitcoin is a young and inefficient market, borrowing bitcoins in size may be challenging. And that may explain at least some of the observed backwardation in bitcoin futures prices. But even if the market matures, Bitcoin will always be subject to the threat of contentious forks. This permanent threat gives rise to a set of forces that will always pressure the future price of bitcoin down relative to spot price. When the odds of a fork are low, these forces will not be sufficient to drive futures prices into full backwardation—they will simply push them down until they are relatively flat relative to the current price. But as the odds of a fork grow, all-out backwardation will be the result.
As for gold, there is no way it can be forked. Thus gold futures should spend far more time in contango than bitcoin futures should.
People who live in developed nations have grown used to inflation of around 2% a year over the last few decades. Why do prices generally rise by that amount? What drives the purchasing power of money in these countries? Why can’t prices stay constant year-over-year rather than increasing?
To help answer some of these questions, let's go far back in time. We'll divide the last one thousand or so years into three monetary eras: the silver coin period, metal-backed notes, and fiat money. How would the nature of inflation have changed as you passed from one era into the next?
The medieval coin era
Silver coins were the chief medium of exchange in the first five or six centuries of the last millennium. Even though coins were composed of scarce metal, inflation was a fairly common occurrence in medieval times. Coins were not perfectly durable. They suffered from wear and tear, both from sweaty hands and as they came into contact with other coins while in a pocket or purse. Since the value of a medieval coin was ultimately determined by the amount of silver in it, the purchasing power of the coinage would naturally decline each year as it shed silver. So rising prices, or inflation, was inherent to medieval coin systems.
The wear and tear of the coinage would often be accompanied by deliberate attempts on the part of the public to remove silver from coins. This came in the form of clipping, in which people would cut small bits of silver from the coin's edge, and sweating, in which a bag of coins was shaken, the dislodged bits collecting at the bottom of the bag. Clipping and sweating were illegal and punishable by death during medieval times, but that didn't stop people from doing it.
To make matters worse, from time to time kings and queens would adopt a policy of aggressively reducing the silver content of coins in order to raise revenues, mostly to fight wars. In medieval times, mints operated differently than they do now. Anyone could bring raw silver to the mint to be turned into coins, paying a small minting fee to the monarch. By reducing the silver content of the coinage, the monarch incentivized everyone to quickly bring in their old silver coins to be coined into new coins. After all, people could get more coins for each ounce of silver they owned, thus allowing them to pay off more debts than before. This would create a one-time spike in mint throughput, thereby boosting royal revenues from fees.
One of history's most aggressive medieval debasers was Henry VIII, who announced ten debasements between 1542 and 1551, each in the region of 30-40%. These diminutions were so successful in driving silver to the royal mints that Henry had to erect six new ones just to meet demand. Between 1541 and 1556, the English consumer price index rose by 123%. It's possible to see this spike in the chart above.
Not all kings and queens debased the currency. Every once in a while one of them would try to restore the standard by announcing a general recoinage. All citizens were obliged to bring in their coins to the mint where they would be weighed and then melted down into new coins. The new coins would have a restored amount of silver in them, thus undoing some of the wear-and-tear-induced inflation of previous years.
Finally, advances in silver mining technology and new discoveries had a major role to play in determining the level of medieval prices. If the supply of silver suddenly increased while demand remained unchanged, the price of silver would decline relative to that of other goods. And since coins were themselves composed of silver, their purchasing power would decline. Or, put differently, inflation would occur as all prices in the economy rose. Deflation, a fall in prices, was just as likely to occur under a silver coin standard. If the population was growing with the supply of silver failing to keep up, then the price of silver would have to rise, or a general deflation would set in.
To sum up, inflationary episodes during the medieval silver coin area could be explained by a complex combination of natural wear and tear of coins, debasement by kings and queens counterbalanced by the odd recoinage designed to restore the standard, and changes in the fundamentals of the underlying silver market. The strongest inflations occurred when all these forces were aligned. For instance, if a new drilling technique suddenly opened up deeper silver deposits for exploitation, and the monarch was simultaneously debasing the standard to help fund wars, then—combined with natural wear and tear—the result would be a rapidly increasing prices.
As long as bankers maintained full convertibility of their banknotes into the underlying commodity, then the banknotes they issued could not have any direct influence on the economy-wide price level. Alterations to the quality and nature of the coins themselves, as well as deeper changes in the underlying silver market, still dictated inflation, as they did in the coin era.
It's worth investigating this point further. Inflation occurs when people have too much money in their wallets relative to demand. With nowhere to go, money becomes a hot potato. Merchant A doesn't want to hold an extra $100 bill or silver coin in their wallet, so he spends it at Merchant B's store, who doesn't want it so she spends it at person C's store, and on and on, each trade in this chain pushing up prices ever so much. The hot potato process only comes to a halt when all prices in the economy have been driven high enough that the $100 bill or silver coin is no longer unwanted, and it comes to a rest.
By providing an alternative exit for banknotes, convertibility short-circuits this hot potato effect. Say a banker had lent too many banknotes into circulation relative to demand. Rather than boomeranging through the economy hot potato-like, an unwanted $100 bill quickly returns to the issuing bank for redemption, long before it has exerted any influence on the price level.
Although they had no direct influence on the general level of prices, banknotes would have had an indirect influence on prices. As paper money gradually became more popular relative to coins, the demand for silver would have declined relative to the supply, and this would have put gentle downward pressure on the silver price and conversely upward pressure on the economy-wide price level. Second, as people opted to use paper money to meet their spending requirements, coins would have slowly disappeared into vaults. Since this mean that coins circulated less, the inflation that had historically occurred thanks to wear & tear, clipping, and sweating would have receded.
The real novelty in the age of metal-backed bank notes was when convertibility was temporarily suspended. During these periods, bankers and the banknotes they issued could have a direct influence on the economy-wide price level. With the traditional exit into specie or coin being severed, any banknote issued in excess of public demand would act like a hot potato. Rather than returning to their issuer, they caromed through the economy, pushing prices higher.
While there were a number of early paper money experiments, the most well-known include the Swedish experience under an inconvertible paper standard from 1745 to 1776, the British suspension of pound convertibility from 1797 to 1821, and the U.S. Greenback era from 1861 to 1878. Each of these periods of inconvertibility was accompanied by high inflation and coincided with major wars. For instance, in the mid-1700s the Swedes had entered into several conflicts including the Seven Years War, while by the late 1700s the British were on the verge of encountering Napoleon. In the U.S., greenbacks were used by the Union to finance their war against the Confederates.
Had banknotes remained redeemable during these conflicts, it would have been impossible for governments to issue large amounts of them—they would have quickly returned to the issuer. By severing the window, many more banknotes could be put into circulation than would have otherwise been the case.
All three suspensions were only temporary as they ended with a return to specie convertibility. It was only in the 20th century that the first permanently-inconvertible standards emerged.
The fiat money era
In 1971 President Nixon removed the ability of foreigner governments to convert U.S. dollars into gold. The world was now on a permanent fiat standard.
Under both coin-based monetary systems and fully-convertible paper standards, the monetary authorities had only a little bit of control over inflation. The key influences over the price level—wear and tear, clipping and sweating, and new precious metals discoveries—were things that happened to the currency, the monetary authority having little say in the matter. When they did exercise control, it was only through policies of coin debasement or attempts to restore the standard.
Under today's permanent fiat system, these external influences have all but disappeared. Instead of being foisted on the economy by chance, the economy's inflation rate is now created by the monetary authority. Those who are in charge can choose to have the currency gain purchasing power over time (i.e. deflation), stay constant, or lose purchasing power over time (i.e. inflation).
In most western democracies, the monetary authorities have chosen a 1-3% inflation rate. This may seem odd, given that a constant price level is attainable. One drawback of perpetual 1-3% inflation is that people must constantly face losses on their holdings of coins and banknotes. This induces wasteful behaviour. For instance, people may choose to hold less cash than they would otherwise prefer. And they will have to constantly make trips to the bank and back to deposit banknotes in order to earn interest (this is what economists refer to as shoe leather costs). If inflation was 0%, or even -1 to -2%, the public would no longer have to worry about perpetual losses from cash and could choose to hold comfortable amounts of the stuff.
While monetary authorities understand the drawbacks of 1-3% inflation, they still choose it as a target because they see a much bigger threat in the form of sticky wages. In the simplest model of an economy, when a shock hits and demand suddenly disappears, prices fall until buyers are once again drawn back into the market. But if some of these prices are sticky, in particular the wage rate, then this downward trek in prices can never occur. Rather than reducing everyone's salary, employers will be forced to fire workers. General unemployment and gluts of unsold inventory—or a recession—are the result.
Central bankers believe they can offset some of these unpleasant effects. While a $20 per hour wage rate may be so sticky that it can’t adjust in the face of an economic shock, an inflation rate of 1-3% means that even though the nominal value of that wage stays constant next year, its real value will have adjusted down to ~$19.60. So in the event of a shock to the economy, a central bank that targets an inflation rate of 1-3% provides the missing flexibility to wage rates, and thus promotes a quicker readjustment period.
The second reason for adopting an inflation target of 1-3% is that at these levels, short-term interest rates have typically ranged between 3-6%. After all, lenders need to make a profit, and will demand a sufficiently positive interest rate to compensate for losses from inflation. The tool that modern central bankers use to guide the price level is the overnight interest rate on balances maintained by commercial banks at the central bank. This tool becomes useless when it falls much below 0%, the effective lower bound to interest rates. Once interest rates are reduced to around -0.75%, banknotes (which yields 0%) begins to look quite attractive as an asset. Reduce interest rates a little bit more and a mass exit from bank deposits into cash will begin, the banking system imploding in the process. So by targeting an inflation rate of 1-3%, central bankers are attempting to build a big enough cushion into interest rates so that they can be sure that their main monetary policy tool has little chance of becoming useless.
And that's why people in Western nations experience a 1-3% increase in prices each year.
What is in store for the future?
So if you had lived through the last 1000 years you'd have experienced a number of different monetary regimes, the price level dynamics different in each one. Even under commodity standards, inflation was a common occurrence. And even on a fiat standard, deflation is an entirely possible phenomenon.
In closing, will the current 1-3% inflation target that has been adopted by most Western monetary authorities ever change? In certain quarters, there is talk of central banks increasing their inflation targets to 4%- 5%. Over the last few years, interest rates have fallen close to—and even in some cases underneath—the 0% bound, muting the power of the central bank's interest lever. If inflation was 4%, say many central bankers, then short-term rates would be much higher (say 6-7%), thus building in an even bigger cushion for subsequent interest rate reductions come the next crisis.
Alternatively, central bankers might one day decide to target an inflation rate of 0%. This would mean that short-term rates would be very low, leaving little-to-no cushion for further policy rate reductions when the next crisis hits. But there are several ways to guide interest rates far below 0%. Some economists talk of banning cash (especially high denomination notes like the ones below), for instance, or introducing a digital alternative on which a negative interest rate can be imposed. These measures would allow a central bank to reduce interest rates to -3% or -4% during a crisis without having to fret over an exodus out of bank deposits into banknotes. During these episodes with deeply negative rates, the public would flee into stocks or gold or cryptocurrencies—but this would be a sign that the desired hot potato effect was working. Having bought plenty of room to reduce interest rates into negative territory when a shock hits, central bankers could safely target 0% inflation rather than 1-3% inflation.
Finally, might we ever see inflation in the teens like we did in the 1970s? Western central bankers have exercised a large degree of independence from their political masters in the executive branch of the government over the last several decades. This has allowed them to maintain careful control over the price level. However, if some unforeseen event were to occur that led Western governments to require huge amounts of financing—say another world war—then governments may try to re-exert control over monetary policy. If so, keeping inflation under control could cease to be an important goal of the monetary authority, and the high inflation of the 1970s might return.
Throughout gold rush and gold mining history, the discovery of a large gold nugget is a phenomenon which always causes excitement throughout a mining community as well as capturing the wider public's imagination. It has probably something to do with so much gold being found at the same time, often with relative ease.
Gold nuggets can be found in alluvial deposits (sediments formed by water movement) or in other placer deposits (formed by other movement), but gold nuggets can also be found in or close to primary gold deposits, for example gold lodes or veins which have been exposed by the weather. "Gold nuggets" can also technically be extracted from hard rock gold deposits as long as the surrounding rock can be removed.
There are a number of gold nuggets which claim to be the world's largest. Obviously, not all of these claims can be true. There are also a number of "largest gold nuggets" lists which confusingly mix historical nuggets which no longer exist alongside nuggets which still exist.
We think a list of gold nuggets which still exist is more accurate, since many historical nuggets are now just legends and have long since been melted down into gold bars or gold coins. Therefore, the following list, based on research to the best of our abilities, profiles the largest 'named' gold nuggets which are still in one piece, all of which are famous, all of which are on display, and all of which can be visited by the public.
1. Pepita Canaã, Brazil
The world’s largest surviving gold nugget is the Pepita Canaã (Canaan Nugget) which was found by miner Júlio de Deus Filho in the Serra Pelada ('Naked Mountain') gold mining region of Brazilian state of Pará in 1983.
The Pepita Canaã gold nugget has a gross weight of 60.82 kgs and contains 52.33 kgs of gold, or 1682 troy ounces of gold. The "Canaan" gold nugget was purchased by the Banco Central do Brazil in 1984, and is now on display in the "Gold Room" of the central bank’s money museum (Museu de Valores do Banco Central in Brazil) in Brazil’s federal capital Brasilia.
Notably, the source nugget from which the Pepita Canaã nugget came was actually larger, but it split into several pieces while being removed from the ground.
In the early 1980s, Serra Pelada became known as one of the world's most notorious gold mining areas when over 100,000 freelance miners flocked there to engage in open air gold mining excavations in vast, dangerous, and crowded conditions. The Serra Pelada has essentially been closed since the late 1980s and gold mining is no longer possible due to flooding and government prohibitions. However, Brazil is still a significant gold producer, with gold production output in 2016 totalling 80 tonnes, according to the US Geological Survey (USGS).
2. The Great Triangle, Russia
The world’s second largest surviving gold nugget is the “Great Triangle”. This gold nugget was found in the Miass area of the Russian Urals mountains in 1842 by Nikofor Syutkin. It has a gross weight of 36.2 kgs and a gold assay of 91%, meaning that it has a fine gold content of 32.94 kgs, or 1059 troy ounces of gold. The "Great Triangle" has dimensions of 31 cms * 27.5 cms * 8 cms, and as the name suggests, it is triangular in shape. When found, it was dug up from a depth of about 3.5 metres.
The Great Triangle gold nugget is owned by the Russian State, and through the Gokhran Fund (State Fund for Precious Stones and Precious Metals), it is currently on display in the 'Diamond Fund' collection in the Kremlin in Moscow. The Diamond Fund is an extensive permanent exhibition of the Russian state's crown jewels, precious stones and gold and platinum nuggets.
While the Urals was one of Russia's first gold mining areas, today, there are extensive gold mining operations in many areas of the Russian Federation, particularly in the East of the country. Russia is currently the world's 3rd largest gold producer, with mining production output of 250 tonnes of gold in 2016.
3. Hand of Faith, Australia
The "Hand of Faith" is a 27.66 kgs gold nugget found by in the area of Kingower, Victoria, Australia in 1980 by a local, Kevin Hillier. This gold nugget has the distinction of being the largest gold nugget ever found using a metal detector. It contains 875 troy ounces of gold, and has dimensions of 47 cms * 20 cms * 9 cms.
The "Hand of Faith" nugget was purchased by the Golden Nugget Casino in Las Vegas, Nevada, USA, and is currently on display in the casino lobby on East Fremont Street in the old downtown center of Las Vegas.
The Golden Nugget Casino claims on its website that the "Hand of Faith" nugget is the world's largest surviving gold nugget, but this is clearly not the case given the existence of other larger gold nuggets such as Brazil's Pepita Canaã and Russia's Great Triangle nuggets.
4. Normandy Nugget, Australia
The "Normandy Nugget” is the name given to a 25.5 kgs (820 ozs) gold nugget found is 1995 in the important gold mining centre of Kalgoorie, Western Australia. Assay analysis shows the Normandy Nugget to have a gold purity of between 80% and 90% .
Western Australia is the country's most important gold mining region and has been since the late 1880s when gold was discovered in a number of areas including Kalgoorie. Today, Kalgoorie is home to the Super-pit, one of Australia's largest open-cast gold mines.
According to the US Geological Survey, Australia is the world's second largest gold producer, with gold mine output of 270 tonnes in 2016.
5. Ironstone’s “Crown Jewel”, California
Ironstone’s “Crown Jewel” gold nugget is a single piece of crystalline leaf gold found in California in December 1992 by Sonora Mining Company. The gold was found embedded in quartz rock, however through a cleaning process involving hydrofluoric acid, most of the quartz was removed to reveal a single mass of gold weighing 44 troy pounds (16.4 kgs).
The Ironstone “nugget” is now on display at a heritage museum in Ironstone Vineyards in California, and is sometimes referred to as the “Kautz Crystalline Gold Leaf Specimen” in reference to John Kautz, owner of Ironstone Vineyards.
Gold and California have been interlinked since the famous northern California gold rush of the late 1840s - early 1850s. The US is still a major gold producer, and in 2016 produced an estimated 209 tonnes of gold according to US Geological Surveys (USGS), putting it in fourth place behind, Chine, Australia and Russia. Nowadays however, Nevada and Alaska are the US' two primary gold producing states, although there are still gold mining operations in California such as New Gold's Mesquite gold mine.
There are actually a number of gold nuggets from Brazil's Serra Pelada region on display in the Brazilian central bank's museum. A list of these gold nuggets can be seen here. Three of these additional gold nuggets are listed with gold content weights of 30.56 kgs, 29.89 kgs, and 28.2 kgs, respectively, which would make them larger than both the 'Hand of Faith' nugget and the 'Normandy Nugget'. However, none of these other Brazilian gold nuggets has received fame in the same way as the Pepita Canaã nugget, and the Banco Central do Brasil seems to prefer to display them anonymously. Technically these other Brazilian gold nuggets from Serra Pelada would push both the Australian nuggets and the Ironstone nugget down the list.
Two historic gold nuggets found in Victoria, Australia in the 1800s were both larger than the Brazilian Pepita Canaã nugget, and both at times still appear in "world's largest gold nugget lists". The first of these was "The Welcome" nugget found in Ballarat in 1858 during the Victoria gold rush. This gold nugget weighed approximately 69.98 kgs. However, "The Welcome" was subsequently shipped to England and melted down by the Royal Mint in 1859 to fabricate Gold Sovereign coins. Replicas of "The Welcome" can still be seen today in a number of Australian museums.
The 2nd large historical gold nugget found in Australia was the “Welcome Stranger” which was discovered in Victoria in 1869. Reports as to its weight vary but are consistently above 70 kgs of gold content. Within a few days of it being found, the Welcome Stranger was cut up, melted down into ingots, and shipped to the Bank of England via Melbourne. However, a replica of the Welcome Stranger nugget can still be seen today at the City Museum in Melbourne.
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