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Gold Rushes through the Ages

Gold Rushes through the Ages
Written by Jon Gulson @jongulson
Posted 05 July 2017

Throughout time, gold has become synonymous as the ultimate store of wealth. Fans of gold – gold bugs – like the metal as they trust it more than fiat money to hold its value.

Fiat derives its meaning from the latin ‘let it be ’. Fiat money – such as the dollar, yen, euro and sterling – is issued by banks and controlled by centralised authorities, backed by trust in the institutions who ‘let it be ’ a unit of value and medium for payment in the economy at large. 

The attraction to gold is fiat money can lose its ability to store wealth through episodes of inflation, where the real value of money (or its’ purchasing power) reduces. This is why gold is sometimes referenced as sound money or natural money.

The world’s traditional (and strongest) currency reserve is considered to be the American dollar. The term dollar is derived from various European languages, including the famous Spanish pieces of eight, derived from the value of physical metal coinage. 

The California Dream
The Americans adopted the dollar as their money of account in 1792 and then subsequently adopted the gold standard to back their dollar. The period from 1880 to 1914 is regarded as the classic gold standard : a period of unprecedented economic growth and low inflation.

Gold rushes have become characterised as periods of increased social mobility, wealth and abundance. They have occurred throughout time and on every continent. Maybe the best known of these is the California Dream, which after 1849 created mass migration for those seeking fortune and prosperity.

The large scale mining of gold in the era where money was tied to the value of gold and other minerals and metals, meant wealth was created and distributed beyond the gold fields.

In time, the California gold rush and dream became indelible in popular culture through Hollywood, Silicon Valley, Napa Valley and the dot com boom. 

Yet all this started with the cycle of a gold rush, the beginning of which is relatively simple (gold being washed from gravel in a pan) and requiring relatively small capital expenditure.

As the gold cycle matures it becomes more intensive, expensive and difficult to extract from the ground and bring to market. This scarcity is one of the factors that attributes value to gold, along with its actual utility. This makes gold deflationary.

The Abandonment of the Gold Standard
The Gold Standard was abandoned by the United States in 1971 in an event known as the Nixon shock, after President Richard Nixon’s unexpected announcement to abolish the international convertibility of the US dollar to gold.

Gold standard

The conditions for abandoning the gold standard lay in the Bretton Woods system, where the United States was committed to backing every dollar overseas (with gold).

Due to monetary expansion and America’s declining share of world economic output, the USA did not have enough gold to honour its obligations. 

The abolition of the gold standard led to fiat currencies floating freely against each other. This led to an age of unparalleled credit expansion.

The current monetary system therefore assigns no definition to gold or relationship to its value and can create money out of thin air or reduce the money supply as it wishes. 

The role of the Nixon shock in the financial crisis of 2007-2008 is still something debated amongst the economic and investment community today.

Satoshi and the Digital Gold Rush
In 2008 Satoshi Nakamoto announced to the world he had found an alternative to cash and created a new form of money.

Satoshi’s invention was the world’s first digital currency based on cryptography and a public ledger called the blockchain. This invention is called bitcoin and many of its features make many believe Satoshi was a gold bug.

Bitcoin operates outside of the realms of fiat money: it is not issued by banks or directly influenced by monetary policy.

Bitcoin’s peer-to-peer payment protocol means it is does not require money managers to be involved: bitcoin is a digital payment network owned by its users. This makes the bitcoin protocol trustless or frictionless.

Bitcoin can be acquired in a number of ways: purchasing it from an exchange for fiat money; being paid or gifted it; or earning it through the process of mining.

To understand the bitcoin mining process is to understand the blockchain: bitcoins are instant transactions which take around 10 minutes to confirm and validate through a public ledger (the blockchain) maintained by bitcoin miners. Once a bitcoin is confirmed in a block of transactions, the miner is rewarded in new blocks of bitcoin.

The miner is solving a cryptographic equation or puzzle on the blockchain and in doing so is maintaining the integrity of the ledger. To do this, the miner will make capital expenditure in hardware to undertake the process as well as meeting the blockchain’s energy requirements.

Just as gold is easy to mine in the initial stages of a gold rush and more difficult in later stages, the same principle applies in bitcoin: in the early stages, bitcoin could be mined on home computer equipment.

Now, bitcoin requires industrial scaled mining farms which are progressively energy intensive.

Bitcoin mirrors gold in another way too: the amount of bitcoin miners are rewarded for confirming transactions, reduces every four years.

The mining process will cease in 2140, with a total of 21 million bitcoin ever being in existence. As gold is regarded as deflationary because of its scarcity, so too is bitcoin.

What this means is the price of bitcoin has gone from $0 since inception in 2009, to nearly $3,000 in June 2017 (at the time of writing).

Just as gold is welcomed as a store of value, so too is bitcoin and other cryptocurrencies which have come into existence since Satoshi’s announcement.

These new cryptocoins have multiplied in value and as with the California Dream where gold spread wealth beyond the gold fields and mines, so too this new form of money is spreading wealth beyond the internet.

Welcome to the gold rush of the 21st century!

Written by Jon Gulson @jongulson
Posted 05 July 2017
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