Major Fiat Currencies Can't Compete With Gold

(13 July 2021) In 1971, to prevent inflation-induced outflow of gold from the country, US President Richard Nixon ended the convertibility of US dollars to gold at a fixed exchange rate. This decision, which was followed by similar measures in other countries, ended the post-World War II period during which the value of national currencies remained unchanged relative to the value of gold. The decades of post-Gold Standard history show that none of major fiat currencies have been able to maintain their purchasing power against gold in the long run.

• The major currencies lost from 78% (Swiss franc, Japanese yen) to 98% (Indian rupee, Indonesian rupiah) of their value relative to gold between 1979 and 2021. Limited supply of gold, and the further constraint of the slow growth of gold mine production, protect gold from inflation, as opposed to the often emission-based increase in the paper money supply.
• In recession and recovery periods, gold outperforms not only individual currencies but also other asset prices. For example, during the great recession and recovery (a period between Q1 2008 and Q1 2010 which saw the decline and recovery of global GDP), the price of gold increased 35% compared to its pre-crisis level in Q4 2007. Prices for other assets — stocks, homes, and commodities — declined by 29%, 12% and 7% respectively.  The same pattern has repeated during the COVID crisis: by Q1 2021* gold gained 26% compared to Q4 2019, outperforming other assets.

*the most recent period for which data is available for all asset categories. Global GDP is expected to recover to Q4 2019 level in Q2-Q3 2021.

Note: Aggregate asset prices shown below are the GDP weighted averages of asset benchmark indices for UK, Germany, France, Japan, and the US. Asset price indices for individual countries other than the US were converted to equivalent US dollars for the purpose of comparison.