Literally speaking gold is just a yellow shiny metal with the atomic number 79. But it has been one of the most important pillars of civilization since ancient times as a store of value so trusted that wars have been fought over it, temples have been looted for it and entire trade routes built around it. It has been the de facto currency for millennia. But why? What makes this particular metal so special that humanity keeps coming back to it, century after century?

To understand that, we need to take a small detour through history.

The Eternality of Gold

Gold’s story as money begins around 600 BCE in the ancient kingdom of Lydia (present-day Turkey), where the first standardized gold coins were minted. But its use as a store of value goes even further back — ancient Egypt and Mesopotamia used gold as a measure of wealth long before coins existed. The reason it kept winning out over grain, cattle, and shells as a medium of exchange comes down to a few remarkable properties:

• It does not rust or decay. Gold is extraordinarily inert, which means a gold coin buried for 2,000 years looks almost identical to the day it was made. It is, for all practical purposes, eternal.
• Its supply is effectively fixed. Annual global gold production sits at roughly 3,000–4,000 tonnes against an estimated total above-ground stock of around 212,000+ tonnes (World Gold Council, 2023). That means new supply adds only about 1.5–2% per year. Nobody can print gold out of thin air.
• It has the longest documented monetary history of any asset. Records of gold’s use as money span the earliest human civilizations, giving it a track record no other asset can match.

These properties made gold the backbone of the global financial system for centuries, culminating in the Bretton Woods Agreement of 1944, where the world’s major economies pegged their currencies to the US dollar, thus anchoring the international markets to gold. This anchor was cut in 1971, when President Nixon ended the dollar’s convertibility to gold. From this moment, every currency in the world became a fiat currency: money backed not by a physical commodity, but purely by government decree and institutional trust.

So If Gold Is So Good, Why Do We Use Paper Money?

Well there are good reasons for that:

• Gold is difficult to secure and transfer. It can be stolen, and moving it for everyday transactions is impractical. Historically, silver filled the gap for smaller purchases, but even that has limits. Try paying for a cup of tea by shaving off a sliver of metal.
• It doesn’t scale for modern economies. The global economy transacts trillions of dollars every day. The physical supply of gold simply cannot keep pace with the velocity and volume of modern commerce.
• Stored gold generates no cash flow. Unlike stocks, bonds, or real estate, gold sitting in a vault produces nothing. As Warren Buffett famously noted, gold just sits there staring back at you. This is a real limitation for capital allocation.

These are legitimate issues. Fiat currencies solved real problems. The trouble is, they introduced new ones.

The Problems With Fiat Currencies

1. They are constantly losing value. Most of the central banks aim for an inflation of 2–3% which effectively means the value of fiat currency is going to keep declining every year by at least 2–3% (In reality inflation hits a lot harder) .
2. There is sovereign risk. Governments sometimes print money far beyond what their economies can absorb. This is the perfect recipe for a catastrophe known as hyperinflation. Germany in the 1920s, Zimbabwe in the 2000s, Venezuela and Argentina more recently, all experienced hyperinflation that wiped out ordinary people’s savings almost overnight. In 1923 Germany, the situation was so bad that people were famously carrying wheelbarrows of banknotes to buy a loaf of bread.
3. New money is not created equally. Whenever new money is printed it disproportionately goes to the richer people who have assets and can take loans against them. This is known as the Cantillon Effect, first described by economist Richard Cantillon in the 1700s. It basically goes like this : Money printed -> Money goes to banks and asset holders (people capable of taking loan against assets) -> These people bid up the prices of assets -> Finally by the time this money reaches to the working class the asset prices have already risen up and they bear the brunt of inflation.

What the Charts Don’t Lie About

To understand the scale at which fiat currencies and assets priced on them lose money you can have a look at the following chart. This chart normalizes the price of the different assets against gold to show their relative performance by stripping away the fiat currency volatility. (You can explore this interactively at https://golddwa.streamlit.app/ )

This chart clearly shows that most of the assets have not kept their value by itself (specially the fiat currencies which have lost over 90% of their purchasing power over the last 20 years).

So how did we get in this precarious situation? Well it was possible due to the US dollar’s hegemony in the international banking infrastructure as the world’s reserve asset. As long as the world was peaceful and the systems stable we did not need to depend on gold.

But now the situation has changed, when the US froze over $300 Billion of russian assets in 2022, central banks all over the world took notice of this and then they started a record buying of gold to diversify their reserves. According to the World Gold Council’s Central Bank Gold Reserves Survey, 2022 saw net central bank gold purchases of 1,037 tonnes — the highest level since 1950. The buying continued into 2023 and 2024. Countries including China, India, Poland, Turkey, and several Gulf states have been diversifying their reserves away from Western-held assets and into physical gold. This will lead to a structural reset of the global finance infrastructure and a revaluation of the different currencies in the world.

Why This Directly Affects You

Now why should you care about all this mumbo jumbo. Well that is because this directly affects you, your savings , your debt and your income. As the world reels over from the oil shock , inflation and possibly stagflation is going to hit like a train. And the fiat currencies will start to lose their value. To hedge against this you need real assets like gold, silver , real estate, cryptocurrencies, and equity markets. Anything which cannot be printed at a whim will gain more value and it is imperative for us to understand this and act accordingly. Otherwise the rich will move their wealth into these assets to live out their comfortable lives and we will be left holding bags of worthless paper for just a loaf of bread.

Sources and further reading:

• World Gold Council — Central Bank Gold Reserves Survey (2022) and Central Bank Gold Reserves Survey (2023) World Gold CouncilWorld Gold Council
• Eichengreen, B. — Exorbitant Privilege: The Rise and Fall of the Dollar (Oxford University Press, 2011) Oxford University Press
• Reinhart, C. & Rogoff, K. — This Time Is Different: Eight Centuries of Financial Folly (Princeton University Press, 2009) Princeton University Press
• Hanke, S. & Krus, N. — World Hyperinflations, Cato Working Paper №8 (2012) Cato
• Jastram, R. — The Golden Constant (1977, updated edition Edward Elgar, 2009) Edward Elgar Publishing
• Cantillon, R. — Essai sur la Nature du Commerce en Général (1755) — full text via EconLib Econlib