How does gold act as money of last resort?
From previous sections, we have understood that gold is just like our fiat money, serving as a tool for completing transactions but has a better ability to store value. However, when extreme conditions such as economic meltdowns like the Great Depression (1929), sub-prime mortgage crisis (2008), natural disasters like hurricane Sandy (2012), or pandemics such as COVID-19 (2020) hit us, we would be in desperate condition for grocery items. The amount of money we have in the bank matters no more than where we could find milk powder, rice, diapers, etc.
When money matters no more
In such situations described earlier, our priorities would be on acquiring the daily necessities and paying more than the actual price is the norm. The shopkeepers would limit the number of sold items simply because of the uncertainties. What if the pandemic continues more prolonged than we had anticipated?
What if the support from the authorities to help the trapped victims of the hurricane got delayed? Hence their supplies are the only reserves. And getting our hands on them would be a costly endeavour.
What are we left with if the situation becomes worse where our monies are no longer valid or acceptable? The next thing we value so much after our monies are the precious metals (gold and silver). Hence these are our only tools available to exchange for our necessities.
Gold as a tool of exchange
Gold is not a peculiar item that needs an elaborative introduction, to be frank. Everyone knows gold and believes it to be valuable. It can be broken down into pieces depending on the value we intend to achieve. The same item has been utilized for centuries by various kingdoms/governments.
Mr. Azizi Ali (financial figure in Malaysia) has stated that 10% of our wealth is an excellent start to be converted into gold. This serves as wealth ‘insurance’ should any uncertainties (political, economic) occur. Their value would not get affected, but instead, they can serve as capital to start a new life all over again. This was exactly what the refugees from Vietnam did when they had no choice but to flee their home country during the war. Before they left, they were able to convert their wealth into gold. These gold items became their wealth, and that was how they could start over at a new place.
This experience gave us a clue that gold not only serves as wealth insurance during tough times, but it is essentially international money that is recognized across borders. Gold is acceptable worldwide during good times, and the same concept stays true even during bad times.
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Your buddy on gold investing,
Naresh G