Economic crises
signal that the current system isn't working as expected and needs
improvement. When it comes to monetary systems, questioning their
fundamentals can lead to doubts about whether the preferred medium
of exchange will continue to be preferred for long. The large-scale
whirlwind of economic trouble around the globe has pushed some to
rethink the role of gold in the economy – and to actually move
toward bringing it back.
A month ago,
a rumor that India
is going to pay in gold for oil imported from sanction-struck
Iran sent shockwaves through the markets. It was no small deal,
both in principle and volume: India is one of Iran's largest oil
buyers, responsible for about 22 percent of total exports and worth
about US$12 billion per year. China is next with 13 percent, and
Japan is third with about ten. All of them are having a hard time
dealing with Iranian oil imports, as the country is under sanctions
caused by Western fears regarding its nuclear program.
Then Israeli
news site DEBKAfile claimed
exclusive knowledge of a possible workaround between India and Iran:
settling the purchases in gold. Indian government officials refused
to comment, which added to the speculation.
On the surface,
the arrangement looked like a great way to settle the purchases
via a stable medium: Iranian currency, the rial, is not widely used
outside its border, and gold's inherent anonymity would have provided
a perfect way to avoid unnecessary attention from the global community.
Ironically, it was precisely the fact that the settlement was planned
in gold that attracted so much attention.
It proved to
be nothing but a rumor, however: the sides decided
to arrange the deal in a more tactical manner. India will partly
cover the purchases with its own currency, and Iran will later use
those funds to acquire imports.
But gold is
not out of the equation yet. The US-initiated sanctions were effective,
at least in the sense of making international institutions avoid
the pariah nation. Reuters reported that Iran
has failed to organize imports of even basic food staples for
its population of 74 million. Prices on local markets rose sharply;
and as the country nears parliamentary elections on March 2, the
government is taking radical steps to provide citizens with basic
necessities. One of those unconventional solutions was offering
gold as barter for food.
"Grain deals are being paid for in gold bullion and barter deals are being offered," one European grains trader said, speaking on condition of anonymity while discussing commercial deals. "Some of the major trading houses are involved."
Another trader said: "As the shipments of grain are so large, barter or gold payments are the quickest option."
Trading in
gold rather than a fiat currency is "cashless." That may
sound as if there's no medium of exchange, but that is of course
a misconception: gold is history's longest-standing medium of exchange.
As long as
the sanctions remain in force and the Iranian government has limited
access to international currency markets, gold will remain an obvious
way to settle transactions. Decreasing
oil imports to Japan, the world's third-largest importer, will
impact the Iranian economy further, draining foreign currency inflows.
Lacking foreign currency may push the country to continue using
its foreign exchange reserves, or gold, to cover its international
liabilities. Oil looks like a viable, though less convenient, alternative
as well.
The Iranian
economy is in a state of crisis, and due to the lack of trust in
its currency, leaders are increasingly resorting to extraordinary
offers to trading partners. The situation would clearly worsen if
the country enters a state of war. While that's still speculation,
imagine what would happen to the price of gold if a part of Iran's
29-million ounce gold reserve becomes a medium – not an
object – of exchange in international trade.
That reduction
in potential supply could be a game-changer, not only because of
crisis-struck Iran, but because it could open the door for other
countries to follow suit. The price of gold would likely respond
very positively.
This scenario,
while possible, may not happen very soon: large-scale trading in
gold has occurred only rarely in recent years. Traces of deals are
difficult to track down due to the anonymity of the yellow metal.
This re-emphasizes our point regarding gold as money in extremis:
when economic push comes to shove, gold will outlast any other medium
of exchange in existence. As the evidence from Iran shows, even
governments – the masters of the central banks – will
resort to mankind's oldest form of money when pressed.
Which brings
us to this evergreen conclusion: Gold is one of the best assets
to own in both good times and bad. It can rise with inflation in
a surging economy, and it can be practical for exchange when times
are bad.
Gold isn't
just a hedge; it's money.
There are many
reasons to convert your savings into gold and silver, but the biggest
is it's the best way to protect
yourself from governmental thievery.
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