To help you with your queries here you’ll find a list of frequently asked questions. If you cannot find the information you can type your question into the search bar
- Allocated gold: Allocated gold is assigned entirely to its owner but kept elsewhere, usually in a vault. The benefits of holding allocated gold is that it cannot be lent out to anyone else. Having allocated gold in a vault solely with your name on it means you can redeem it entirely. Glint’s gold is allocated. Unnallocated gold allows banks to sell more gold than they physically have in their vaults. The legal title to the gold may sit with the provider rather than the person who has bought the unallocated gold. Unallocated gold exposes you to the same risks as having your cash in the bank.
- Assay: An assay is a test and sign of proof of the gold’s quality. The UK has assay offices in London, Sheffield, Birmingham and Edinburgh – each assay office marks its gold with a different sign, a Hallmark.
- Asset-backed securities: securities linked to the value of an underlying asset such as a portfolio of mortgages or credit-card receivables
- Bad bank: when a bank is rescued and/or restructured its unwanted assets are placed in a ‘bad’ bank to be run off or otherwise disposed of.
- Bail-out: the rescue of a failing bank, usually requiring government money
- Banking union: the proposed centralisation of ultimate responsibility for oversight of private or commercial banks regarded as systemically important in the European Union
- Bank run: A run on a bank occurs when a large number of customers try to withdraw their deposits in unison, due to concerns about a bank’s ability to meet its long term financial obligations. A good example in the UK is that of Northern Rock, which in 2007 became the first British bank in 150 years to fail due to a bank run; it was nationalised in 2008 by the British Labour government. In May 2019 the UK bank Metro Bank was subjected to a false claim on social media that it was about to collapse and a ‘silent’ run – depositors remotely their withdrawing cash started. In the US the Office of Thrift Supervision was forced to shut down Washington Mutual , the country’s largest savings-and-loan institution, on 25 September 2008, due to a massive run which had seen depositors withdraw $16.7 billion in the ten previous days.
- Basel Committee on Banking Supervision: an international committee of bank supervisors from 28 member countries which regularly meets to develop recommendations on bank supervision. This has created increasingly complex sets of rules (Basel 1 in 1988, Basel 2 in 1998) the latest of which, Basel 3, was agreed in 2019 but will take effect from January 2023.
- Bullion: Bullion is an amount of precious metal that is not minted as a coin but has a pre-designated weight, e.g. one kilo.
- Central bank: A central bank – for example the Bank of England or in the US the Federal Reserve – is the sovereign bank of a state. Its role varies but essentially it decides monetary policy, how much fiat currency to issue, and what the interest should be. The US Federal Reserve has a dual mandate of maintaining stable prices and maximum employment. Central banks also set targets for inflation, which was generally around 2% in pre-Covid days but has become looser in the US and elsewhere.
- Debasement: This originally referred to the deliberate issuing coins of inferior metal value at the same face value. Under Henry VIII and his son Edward VI, a sovereign fell in weight between from 12.96g to 10.98g, and from 23 carats to 22 carats.
- Gresham’s Law: Sir Thomas Gresham wrote to Queen Elizabeth I in 1558 that “good and bad coin cannot circulate together”. He was referring to her father, Henry VIII’s, habit of minting coins with the addition of base metals, thus lowering the coin’s value. People preferred using in transactions the thus debased coins, holding back the coins which they knew had greater gold and silver content and which therefore had more inherent value. Thus Gresham’s Law has descended until today it’s usually summarised as ‘bad money drives out good’.
- Seigniorage: Seigniorage is the difference between how much it costs to make physical money and how much value that money is given by the issuer. For example, if it costs just 5p to make a £10 note the seigniorage would be £9.95. Seigniorage typically operates at a profit for the state.
- Shrinkflation: a form of inflation whereby instead of a product increasing in price its size decreases. Shrinkflation is a way of for manufacturers to pass on rising costs of production to customers. While the size of a product decreases, the price stays the same or even rises.
- Systemic risk: this is a risk within a system that has the potential to bring down the entire system. In financial terms it is used to imply that there is an inherent risk in a system that if unchecked could stop the entire functionality of that system. In the 2007-09 financial crisis the crash stemmed from a series of failures that harboured systemic risk. The failure of banks such as Northern Rock and Lehman Brothers implied systemic risk because it affected the entire global economy. That measure of risk compelled governments to act, intervening in the economy; namely to save banks that were considered ‘too big to fail’ such as RBS with bailouts funded by the taxpayer.
Who owns the UK government’s debt?
The UK owes approximately £1.8 trillion to a host of different financial organisations. According to FullFact:
- British insurance companies and pension funds own almost a third: about 30%.
- The Bank of England owns about a quarter or 25%.
- Other UK financial institutions like banks own 17%, just over a sixth.
- Another quarter of the government’s debts, about 27%,are owed to foreign institutions. That means the debt and the interest on it is paid out to organisations overseas.
Countries with high levels of public debt can sometime default on paying back their loans. This is seen as very bad news for their economies. A country with very high public debt is Greece (approximately 177% of GDP), this debt is largely ‘owned’ (lent by) foreign organisations such as the World Bank and the ECB. In 2015 Greece had to default on a $1.7 billion payment to the International Monetary Fund. This meant it could not get further financial assistance until the loan was repaid or restructured and it sent warning signs to investors in the Greek economy that they might not get their money back.
A default such Greece’s can be seen as a Catch 22. The economy has suffered severely, yet cannot get essential investment because it is seen as at risk of default but it cannot repair its finances without economic growth which is very unlikely without outside investment. The ECB, based in Frankfurt, tried to impose a policy of austerity on Greece to avoid defaults. This has had a very negative effect on the Greek economy and on Greek society with long-lasting repercussions for potential prosperity.
An anti-austerity demonstration outside the Greek Parliament in Athens
Other notable country defaults in recent years include Argentina which suffered a serious default in 2001, leading to restrictions on the withdrawals Argentinians could make from their own accounts.
Purchasing power is a gauge of how much a currency, usually a paper money supply can buy. Inflation, targeted by central banks and governments to increase the money supply, typically means the value of a currency is worth less over time and acts to reduce that currency’s purchasing power. If you take the pound as an example you can buy less with it than you could 10 years ago – that means its purchasing power has gone down.
One way to look at purchasing power is by taking the price of an asset such as a house. Thirty years ago, £250,000 would have given you much greater purchasing power because you would have been able to afford a wide range of options, sizes and locations. Now £250,000 will give you access to a limited amount of housing stock. This is because the price of housing has gone up and so, concurrently, the purchasing power of your £250,000 has gone down.
The above chart shows the decline in the purchasing power of the pound. Source: ONS
Gold is one way of retaining your purchasing power because it is seen as retaining its value. Over the last thirty years gold has gone up significantly in pound terms. This represents a rise in the cost of gold, so if you were buying gold now you could rightly say the pound has lost purchasing power against gold because you can afford much less gold than you could previously.
However, if over time, you transferred your wealth into gold by buying gold with pounds, your gold would maintain its value because it would be worth more pounds over time (having increased in value). Because gold is now fully liquid you would be able to spend it and buy the same amount, or more, goods and services as you could previously – thereby retaining your purchasing power and mitigating inflation. Gold is essentially acting as a sound money currency that has kept its purchasing power for millennia.
Gold can be bought in numerous ways online. It is possible to purchase gold online and have it delivered to you and you can also make purchases for collection. Technology also now allows you to buy gold via a smartphone app. Glint has sought to make gold buying and gold spending instant and easy by making gold money again. This is done by combining gold purchase online via an app with gold spending with a Mastercard.
With Glint you can purchase any amount of gold. The app allows you to hold numerous paper currencies such as dollars, euros or pounds and transfer between them and gold. To spend your gold, you can simply select your gold wallet and spend out of it, on your Glint Mastercard. The gold you buy is legally owned by you, is held in a vault in Switzerland and will be redeemable. By making it possible to buy, save and spend gold online Glint has made gold money again, allowing users to protect their wealth from inflation.
Yes. You can buy a physical bar of gold from a gold dealer. You can also hold gold in part on the Glint app, allowing you to buy, save and spend gold in any denomination via your smart phone and Mastercard.
Owning gold gives you a tangible asset which has proven to retain its value over thousands of years. Banks, states, governments, companies, empires, kings and individuals have all sought to hold physical gold throughout human history as a means by which to secure their wealth. Modern technology now allows you to buy a bar of gold, or any amount of gold, via a smartphone app. You will legally own the gold which will be stored in a vault in Switzerland and which will be redeemable.
The Glint app also comes with a Mastercard allowing you to spend your gold anywhere in the world. Not only does this allow easy and instant ownership of gold but it makes it money, protecting your wealth and giving you complete liquidity.
Gold is considered a good investment because it is safe and a historically permanent store of value but it also must be considered a good investment because of its ability to act as portfolio insurance. When world events take turns for the worst, stocks, bonds and many currencies often collapse while gold moves higher. Gold is held by many investors because it is something they see as having zero counterparty risk, it is no-one’s liability.
Since 1971, when the gold was allowed to float against other currencies it has generally risen strongly. From $40/oz at that time, gold reached $800/oz in 1980, $250/oz in 2000 and $1900/oz in 2011. Today, it is at $1200/oz. While gold may seem to fluctuate against other currencies, it should be remembered that an ounce of gold is always an ounce of gold, whether during the times of the Pharaohs or today.
This entry is for reference only and in itself does not constitute investment advice.
Buying gold is considered a good idea by many because gold acts as a hedge against market volatility and inflation. Over thousands of years, gold has shown that it can keep its value while many other assets and currencies often depreciate in value or disappear altogether. It is often seen as a good idea to have exposure to gold in any diversified portfolio.
Most investors and professional financial advisers will have some gold in every portfolio. This is because gold is considered such a safe haven that it will always keep its value even if everything else goes to zero. Over time gold has proven to hold value, especially against fiat currencies which are subject to inflation. If the price of gold goes up in pound terms, it is keeping its value while the pound is depreciating. Recently this happened in Turkey where gold reached new highs in Turkish lira, providing a much needed store of value against a rapidly depreciating currency.
Thanks to the marrying of gold with technology it is now possible to buy, store and save gold as money via your smartphone. You can also spend your gold anywhere in the world via a contactless Mastercard.
Big banks will sell certificates of ‘unallocated gold’ to large investors or funds so that they have portfolio exposure to gold. However, for the average person it is not possible to walk into your local branch and buy a bar of gold.
Central banks and commercial banks also sell gold to each other as well as the storage facilities for holding gold.
If you are hoping to buy gold there are numerous ways you can do so. The easiest way to buy gold is via a smartphone app. The Glint app allows you to buy and save gold as well as spend in via Mastercard anywhere in the world. The app is FCA regulated and uses Tier 1 banking accounts to keep your gold safe. Purchase of gold is instant, and the gold is legally owned by you, stored in a vault in Switzerland and will be redeemable.
There are many ways to effectively ‘buy’ gold:
You can actually buy the physical metal itself from a gold dealer. This will come with a mark-up and if you want to store the gold with them you will have to pay storage fees. Alternatively, you can keep the gold yourself but will need to have the appropriate security at your home. As well as gold bars you can buy gold coins from numerous mints around the world. Many of these are collectors’ items and so have a value above that of the physical gold from which they are made.
You can also invest in a gold ‘ETF’. A gold ‘ETF is an exchange traded fund made up of issued shares against the underlying asset. If it is gold based it may own physical gold solely, or other assets attached to gold such as mining shares. You can buy shares in the fund which move in accordance with all these market prices. If you invest in an ETF you own ETF shares rather than gold.
You can buy stocks and shares in gold management – this is usually done by buying shares in gold mining companies. These shares move with market considerations and can be volatile.
You can also buy gold on your smartphone: Glint allows you to buy gold for a fee of just 0.5% via a smartphone app. The gold is legally yours and can be redeemed. From 2019 there will be a storage charge of 0.125%. The gold is fully liquid and can be spent or converted into local currency at any time, you can even withdraw the value of your gold in the local currency from an ATM. Based on Glint’s research we believe this is the cheapest, easiest way to buy gold.
Japan has a debt to GDP ratio of 239.3%, around $11.8 trillion. This is significant because it means Japan’s debt is over twice as much as its annual economic output. Debt obviously comes with the need to pay it back with interest. Therefore, it is very unlikely Japan will payback all its debt anytime soon.
However, Japan’s debt is mostly owned domestically meaning it is very unlikely there will be a default because to do so would be incredibly damaging for its economy. Japan’s debt has been largely created by the buying of government bonds by the Japanese central bank (the Bank of Japan) – using the central bank to bail out the state. Interest rates on debt are currently very low. However, the risk remains that Japan could reach a situation where it is unable to pay off even the interest on its debt as the country’s deficit increases. This would make a default more likely.
Other major economies also have very high levels of public debt. The UK’s debt is 85.8% of GDP, the US’ debt is approximately 107% of GDP.
The USA has debt of approximately $20 trillion worth of debt, 31.8% of global debt and 107% of its GDP. Such a high-level of debt is a cause for concern for multiple reasons.
The debt needs to be re-paid with interest meaning more and more of tax revenue from tax payers goes on paying off interest, rather than welfare service.
Governments get loans by selling bonds with a rate of repayment. If inflation goes above this rate, then it is easier for the government to repay the loan – BUT that means that savers lose out because the bonds they have bought are worth less AND everybody else loses out because rising inflation makes everything more expensive.
Therefore, such high debt levels could encourage inflationary behaviour from governments and central banks.
Additionally, although the rate of debt accumulation is seen as a high level of risk for investors, rather than the level of debt, high debt does leave countries vulnerable to fluctuations in the global economy as they may struggle to attract future investment when needed.
The world’s governments owe $63 trillion.
That’s around $8,289 for every person on the planet.
An interest of just 1% on that number is $630 billion – more than the GDP of Sweden, Poland or Belgium.
The USA’s national debt is the world’s largest at around $20 trillion, making up around a third of the world’s total debt. It has risen by $1 trillion every year since 2007.
The UK spends around £46 billion a year on interest repayments of its debt. That’s almost 5% of GDP and 8% of the yearly tax revenues.
It is hard to know how long a fiat currency will last. Many fail due to inflation, assimilation, monetary reform, war or simply lack of confidence. While some, such as the British pound, have been around for hundreds of years, but the average life expectancy of a paper, or fiat, currency is estimated, by some, to be 27 years.
By contrast, gold is seen as the world’s oldest currency because it has kept its value over millennia. Every paper currency is subject to manipulation by central banks and governments who can cause inflation by changing exchange rates, quantitative easing or increasing the amount of money they print. It is not possible to do this with gold because you cannot increase the amount available. While the price of gold changes all the time, gold has never inflated in the same way a paper currency has. Additionally, it is ‘sound money’, meaning it is physically backed by the value of the metal itself, as opposed to paper money which, many would argue, always deflates away to the base value of the paper it is printed on.
For this reason, gold is seen as the ultimate hedge to offset the risk of having paper money. This not only applies to saving gold but to using it as spendable money too – something that it is now possible for everyone to do.
The famous economist John Maynard Keynes said “in truth, the gold standard is already a barbarous relic”. He was implying there was no need to peg the value of currencies to gold and thereby encourage the stockpiling of gold. However, nowadays gold is seen by many as the answer to the ravages of inflation, if everyone were able to use gold as money, both to save and spend in, they would be free of the constant threat of losing the value of their savings to the depreciation of paper money.
Gold has been around a long time and has always been seen as the ultimate store of wealth and it remains relevant as such.
The price of gold is constantly moving as the market values it according to supply and demand. Typically the price of gold is always taken as the currency cost of 1 troy ounce in US dollars.
When it comes to money gold is also a good way of seeing the price of a currency: Not how much is the gold in US dollars but how much are US dollars worth in gold terms. By looking at it this way you can get some indication of how the dollar (or the pound) has inflated over time.
The gold standard is the fixing of the value of a currency to the price of gold. Before 1971 the USA was on the gold standard, fixing the price of the dollar as one 1/35 of an ounce of gold. This mean the price of gold was also fixed, in dollar terms, at $35 an ounce. This gold standard meant the dollar could not be inflated in value as it was fixed to the value of gold. When President Nixon took the dollar off the gold standard he made inflation possible. Today the price of a gold ounce in dollars is over $1,000.
Gold has always had value. The kingdom of Lydia in modern day Turkey was the first to mint gold coins around 700 BC. The weight, rarity and lustre of the metal has given it value in all cultures throughout human history. It is easily malleable, attractive and scarce, meaning it has always been sought after. In addition to this gold has many modern day scientific uses as it is an excellent conductor. Gold has historically kept its value. An ounce of gold would have bought you a fine toga in Roman times and would buy you a fine suit today.
Additionally gold has always been sought by banks as a reserve for the money they loan out. By holding gold, banks have something inherently valuable and which will retain value if the value of paper currency collapses.
The USA has the world’s largest gold reserves: 8133.5 tonnes. The majority of America’s gold reserves are held at Fort Knox in Kentucky. However, it is alleged that the gold has not been audited since 1953 so no one outside the US Treasury is really sure exactly how much gold is there and of what quality.
Holding so much gold allows a state to back its currency to the value of gold – in essence the dollar can be said to have (at least some of its value) because the US Federal Reserve has a lot of valuable gold. However, in reality no currency has been fully tied to the value of gold since the US came off the gold standard in 1971 – allowing the dollar, and other currencies to ‘float’ and inflate away their value.
Individuals can hold gold to secure their wealth, making sure they have something tangible that will keep its value throughout its lifetime, even as money in the bank suffers inflation.
In 1971 8133 tonnes of gold would have been worth approximately $9 billion.
Today it is worth approximately $312 billion.
Quantitative easing (QE for short) is a policy of increasing the money supply (literally printing money) in order to keep the economy more liquid and to allow banks to continue to loan to each other with low interest rates. The policy was adopted by the world’s central banks following the financial crash and contributed a huge amount of cheap money to the financial system. While QE initially provided much needed liquidity, it’s ongoing use has had consequences globally, economically and socially but much still to be seen.
Quantitative easing is typically done when a central bank buys government and corporate bonds, injecting money into the system while expanding the centrals banks’ balance sheet. Banks also keep interest rates low or even negative so as not to over pressure the government with high repayments. The resulting ‘cheap money’ is a short term fix for an ailing indebted economy, but is also linked to inflation as an excess money supply and low rates of return on loans means producers seek returns on goods and services by raising prices.
In a nutshell shrinkflation. As the cost to produce the item increases, the package size might decrease to keep the price relatively low.
Because of shrinkflation if you want to buy the same goods or services as before you will have to spend more money, meaning you are getting less for each pound. This shows why shrinkflation is a form of inflation. One way of countering inflation is by putting your money into something that will increase in monetary value over time. Gold has long been considered an excellent choice because it holds value and you can spend it as money.
Imagine if a packet of crisps is 50% smaller. To get the same amount you would have to spend £2 instead of one. Another way to see this is the pound buying you half as much. However, if you spent the gold you had bought for £1 you would now be able to get £2 worth of crisps because the gold had also increased in value to £2 – and you can now spend that gold as money.
Also – If you are saving and spending in gold you are giving yourself maximum liquidity and not incurring any costs by moving between currencies or assets.
Sound money is a term used to refer to money that is backed by a tangible asset such as gold or silver. By contrast ‘paper money’ which makes up the majority of currencies, is backed only by government decree, or ‘fiat’. A legitimate criticism of a fiat currency is that it will always devalue, via inflation, to return to the inherent value of the paper it is printed on and nothing else.
Were the same thing to happen to sound money, it would still have considerable value because the gold or silver which makes it up is valuable. This is why the origin of currency is synonymous with gold – it was the best holder of value for exchange.
Paper money is essentially an IOU – its value is based on debt rather than the value of the metal which backs it up. Sound money is valuable because gold is valuable. Traditionally, sound money came in physical coins but in the digital age you can now spend physical gold as money anywhere in the world.
A ‘bail in’ is seen as the opposite to a ‘bail out’ because rather than a third party such as the government stepping in to help a bank by giving it more capital, the bank’s creditors, those to whom it owes money, agree to write down the debt, or the amount of money the hold with the bank.
In Cyprus those holding over €100,000 in the Bank of Cyprus were forced to spend 37.5% of their account on shares in the struggling bank. Rather than taxpayers footing bill for recapitalising the wayward bank, savers were forced to do so.
A bank bailout is when a bank receives money from the government to stop it going bankrupt. Perhaps the most notable case was the bailout of RBS in the UK in 2008. The government bought a large share in the bank for £45.5 billion of taxpayers’ money. Ten years later, this money has still not been fully recouped.
The money given to RBS was facilitated by a share purchase by the government, making the taxpayer the largest shareholder in the bank with 58% of it. The government’s ownership of normal shares eventually went up to 71% before falling back down to 62% in 2018.
The result of the bailout meant taxpayers effectively owned the bank, its debt, its liabilities and its toxic assets and all the risk that entailed. Because RBS has a share price lower than the bailout price, it has lost the government money. Shares have been sold back to the market for 330p and 271p respectively. In 2008 when the bailout began, £15 billion was spent on shares at 655p. Over the next ten years the bank lost £130 billion. (However, the UK government did make around £500 million from the sale of its stake in Lloyds bank.)
Bailouts are seen as controversial because they were seen as rewarding, or at least not punishing, failure. Although banks had acted recklessly and without the prudence expected of them, they were given money to survive, the argument being that many customers could potentially lose their savings if the bank was not kept solvent. This gave rise to the concept of a bank being ‘too big to fail’, implying, in part, that if a bank is poorly managed enough and it owes enough people money, it can rely on the government to save it.
Central banks hold gold as part of their country’s national reserves. A national reserve is the money held to help a central bank keep the economy trusted and liquid and to back up the value of the currency that central bank prints. Typically, a central bank will hold a number of other reserve currencies as well as its own, usually US dollars, euros, Japanese yen, British pounds and Swiss francs as well as gold.
It is now possible for individuals to hold gold as well as multiple other currencies. However, unlike central banks this gold can now be spent as money. By holding gold, individuals can offset the risk of inflation in volatile currencies. Typically, as a fiat currency such as the pound or the dollar, decreases in value, the price of gold in that currency goes up. That is why central banks will have gold, to maintain the value of their national reserves – something individuals can now also do.
Hyperinflation is the rapid decrease in the value of a currency, effectively rendering it useless as a medium of exchange. Hyperinflation typically occurs when a state tries to get out of a crisis by printing more and more money – further devaluing it. Notably examples include Germany’s Weimar Republic, Robert Mugabe’s Zimbabwe and Venezuela today.
Inflation can be the seen as the rise of prices. When prices go up the value of the currency goes down: the rise of the cost of a pint of beer from £4 to £5 represents a 25% devaluation of the pound because you are having to spend 25% more money to get the same thing.
Central banks and politicians will try to target inflation. They will try and stop it getting too high, but they will encourage a little inflation as they see it as helping growth by getting prices to go up along with wages. They will also see inflation as useful in helping them with their debts. If inflation devalues the pound it is easier for the UK government to pay-off the bonds it has issued at a previously fixed rate. The current inflation target in the UK is 2%. Some people interpret inflation as a tax because it is something everybody has to pay. If wages and economic growth are below inflation then it can affect the prospects and prosperity of millions. Money in the bank will more than half in value within 20 years at just 4% inflation, it will be worth just 44% of what is was. At the time of writing RPI inflation in the UK is 3.5%.
Inflation is the key factor that makes people save in assets other than just putting their money in the bank.
One of the best ways to protect your money from inflation is by putting it into gold. Gold tends to gain in value, meaning it will protect the value of your wealth. Gold is seen as the oldest form of money because, even after thousands of years it still has the same value – unlike many paper currencies which have literally inflated away to nothing. An ounce of gold would have bought you a fine toga in ancient Rome. Today it is worth around £1,000 – enough to buy a fine suit in London.
Not only does gold protect you from inflation but it is also money in its own right and can now be spent instantly anywhere in the world on a Mastercard. This unprecedented liquidity means there is no need to worry about savings being inaccessible in another asset because by using gold you are using inflation-proof money, to some degree.
Shrinkflation is a form of inflation, whereby rather than spending more to buy the same product, you spend the same amount but get less of the same product. Perennial shrinking chocolate bars are seen as a great example of this!
Many cryptocurrencies are seen as fraudulent because people exchange real money to purchase a coded ‘coin’ whose value is completely arbitrary; most cryptocurrency cannot be spent and its value is purely speculative. The concept of cryptocurrency is not inherently fraudulent but the facilitation of unregulated cryptocurrency networks and the multitude of independent coin offerings (ICOs) has led to much fraudulent behaviour and many victims.
The cryptocurrency bitcoin has been said to resemble gold because its code, held on the blockchain, means only 21 million bitcoins can ever be mined – like gold, it is finite and cannot be printed. Many investors were drawn to bitcoin because they saw it as ‘digital gold’: a currency that had all the value of gold which could be spent electronically. Conversely though, the reality has been somewhat different.
Bitcoin is unregulated and repeated hacks have showed it as vulnerable and while gold is subject to market prices, bitcoin has seen volatility in extremis. It is also difficult to spend and slow to transact in. By contrast gold is now fully integrated with the digital payments system via an FCA regulated firm (Glint) which keeps your legally allocated gold physically in a Swiss vault.
Like bitcoin though, gold has also been seen as an alternative currency, giving users independence from the financial system and the opportunity to spend a money that can’t be printed. But while there are parallels, gold and bitcoin are different and it is difficult to translate a model from gold to cryptocurrency.
Every currency has a gold price, however as the dollar is the world’s most common currency the gold price is most often given in dollars. In 1971 when the value of the dollar was fixed to the value of gold this was $35 per ounce of gold. It is now over $1,000.
Because gold is seen as keeping its value over the medium and long term, those holding gold will often look at the dollar (and other currencies) in gold terms. If the price of gold in dollars goes up this can be seen as gold gaining value but equally it can be seen as the dollar losing value to inflation. Either way, holding gold allows you to hedge against this by holding an asset that keeps value. This is also why gold is seen as the oldest form of money, simply because it has kept its value since ancient times.
Fiat means ‘by decree’ and is another term for the paper money that is given worth by decree of the state. It has worth because a government says it is legal tender but the intrinsic paper of coinage from which it is made may not have any value.
Fiat money typically contrasts sound money because its only value is in what is assigned by the government, whereas sound money has the value of the metal, usually gold, that it contains – a coin made of gold has more value that a coin made of copper, even if they are both given the same ‘fiat’ value. When the UK was still on the gold standard it was possible to exchange a £5 note for five pounds of gold at the Bank of England. That is no longer possible and the ‘five pounds’ is merely a fiat value given to the note by the state.
The term ‘fiat’ comes from the latin, meaning ‘let it be done’.
Gold has always been used as money but it fell out of common use as currency when it became easier and much cheaper for governments, through their central banks and treasuries, to print notes as register of debt. These were essentially ‘I owe you’s which could then be exchanged on the open market. You might receive £5 for providing a delivery of corn but technically you would have to then go to the Bank of England to redeem your five pounds of gold.
You can now no longer do this and the paper money system is taken as currency, even though it is still based on debt.
In 1971 the dollar, the world’s largest reserve currency, came off the gold standard. So arguably, as there were no mainstream currencies attached to the gold value, gold was no longer money. However, central banks still continue to hold, buy and exchange gold.
Today you can once again use gold as money anywhere in the world.
Gold is stored all around the world by individuals and banks alike. The world’s biggest store of gold is Fort Knox in the USA. There is estimated to be over 6,000 tonnes of gold held there at a value of over $200 billion.
London is also a centre of gold storage with a number of vaults in the financial district of the City looking after the gold held by financial institutions. The biggest gold storer is the Bank of England which has over 5,000 tonnes of gold in its vaults. However, only 310.3 tonnes of this belongs to the UK national reserves. The rest belongs to other financial institutions using the Bank’s vaults. Recently, a number of countries have begun repatriating their gold, i.e. bringing it back from storage abroad.
The LBMA is a global authority on the standard of gold and other precious metals. There are numerous authorities on gold quality and best practice for dealing with gold such as the Shanghai Gold Exchange but the LBMA is seen as the benchmark, in the US and worldwide. All bullion banks trade LBMA certified gold.
By certifying gold, its provenance and history can be proved. This means that the owner does not have to worry about the gold coming from a non-reputable source or that it has been stolen. LBMA also helps ensure standards within the mining industry. Gold regulation is one example why it is seen as a safe and globally understood asset, in contrast to an investment such as cryptocurrency which is unregulated and can be potentially fraudulent.
A troy ounce is the weight in which gold is traded, it is equivalent to 31.1035g. The price of gold is taken as the price of one troy ounce in dollars.
A market is seen as ‘toppy’ when it reaches a perceived price ceiling. Investors will refer to markets being toppy when they see prices as at their limit or even inflated. In such a circumstance they will expect a ‘correction’ whereby a market can lose 10-20% of its value to come back in-line with price expectations.
A market sector such as property or a commodity such as gold or oil might be seen as toppy if it has experienced a significant and pro-longed rise in price. Investors will look at reasonable demand and the rest of the related markets and decide whether the current valuations are accurate. If not, the market could be prescribed as ‘toppy’ indicting its top has been reached and it is now likely to go down.
The spread is the difference between the price gold is being sold at and the price gold is being bought at. The spot price of gold is taken as the average between these two prices. If you are looking to buy gold you may be subject to price increases above the spot price. Brokers can often charge a significant mark up and offer you buy back rates from their own spread that is not representative of market rates.
Non-investment professionals can now buy gold instantly on their smart phones, taking advantage of the live gold price with a small mark up on each transaction.
The interbank rate for exchanging currencies is the rate at which large banks make large currency transactions, typically worth millions or billions of pounds. It is seen as the most competitive rate which most closely represents the value of one currency against another.
The interbank rate is found by taking the mid-point between the selling price of a currency and the buying price of a currency. Typically, banks have enjoyed large profits by taking a spread on this price: always charging a percentage, say 2.5%, above the spot price when they give customers a conversion rate. Some companies then might charge an additional conversion fee. If you take out money abroad, you might also have to pay another fee to the bank that runs the ATM. All in all, this means that the average person gets an exchange rate that is very far from the interbank rate – sometimes as much as a 12% mark up just to spend their own money in a different currency.
As a result, many new financial firms are offering lower rates. Glint gives you currency transactions (pounds, dollars, euros, gold) at the interbank rate plus a fee of just 0.5% per transaction.
The current market price of an asset or commodity, essentially the price of the moment. This can move several times a minute. Everything traded on a market can technically have a spot price: from shares in Apple, to oil, to gold, to the market itself. Both the FTSE 100 and the S&P 500 will have spot prices that move constantly while the market is open, reflecting the overall value of the market.
A spot-price can be different to futures price. If people are buying gold for delivery in 3 months-time they might be paying at an agreed ‘futures price’ which is higher or lower that the current, spot price. Futures-prices and spot-prices help gauge an asset’s value and provide a pricing structure. Futures-prices are informed by previous spot-prices.
Selling shares or any asset without prior ownership is someone ‘shorting’ the market; that is hoping it will go down and be profitable before delivery is required.
Shorting a market is seen as a demonstration of low confidence in it because you perceive it as going down, either because you believe it is currently over-priced, or you foresee a major event which will see the asset fall in value. There have been numerous famous ‘short’ calls.
When the UK pound looked set to exit the European Exchange Rate Mechanism in 1992, George Soros famously shorted it, making an alleged $1 billion in the process. More recently John Paulson of Paulson & Co foresaw the coming financial crash of 2008 and shorted mortgage-backed financial assets, selling them before they went into free-fall.
Currencies often see short calls because their fortunes are tied to those of nation-states, whose actions might be easy to predict. In large enough volume, short calls can be perceived as steering the price as if enough investors believe something will drop in value it is likely to do so.
Raw gold is gold that has not been certified or registered. Raw gold is very hard to market because its purity has not been proven. All gold used as money or stored by a bank or individual should have a proven provenance. This will usually be via a certification from an organisation such as the London Bullion Market Association.
Because gold can now be used as money via the global digital payments system it is important that it is LBMA certified. Raw gold should not be used as money.
Gold can be ‘pooled’. Often gold pools take on liability, claiming to hold more gold than they physically do. A gold pool is not the same as allocated gold. Like banks with your money, a gold pool could be used to take out loans or as insurance. Many people buy gold to avoid such risk and will not seek to pool their gold, rather they will own gold so they can have an asset that has proved value retention and that is no one else’s liability.
One of the advantages of owning allocated gold is that you own it 100% and can redeem it physically at any time. This is not the same with pooled gold, or even with the cash you hold in the bank, which can be loaned out without your knowledge and, in the event of a bank run, which you might not be able to take out.
To ‘go long’ on something, is to pay for it now in the hope that it will go up in value – as opposed to going short which is to sell something now and pay later for it, hoping that it will have lost value in the meantime.
By making any investment in the hope that it will increase in value, you are ‘going long’ on an asset. If you buy gold now and it goes up in value over the next 10 years you have profited by holding it for a long time and benefitting from a rise in price when you come to sell it.
By finding and holding an asset that has increased in value you can protect your wealth because you are not exposed to inflation. Assets such as gold tend to go up, thereby increasing their value in pounds.
How easily something can be exchanged or moved into something else. Money is fully ‘liquid’ because it can be exchanged for most other things. When a person sells an asset – be it shares, a house or a car, they are said to have had a ‘liquidity event’. This is because their wealth has gone from being ‘illiquid’, i.e. unspendable in the form of a car, to liquid, i.e. fully spendable money.
In any investment portfolio an investor will always seek to have a high-degree of liquidity. This means they will hold some cash which can easily be moved into another asset, or they will hold assets that can quickly be sold in case they start losing value or they want to take all their investments out of risky markets.
Assets such as houses, cars, or even whole companies can be seen as having low liquidity. This is because it is very hard to move your money out of them quickly – if you fear a crash in property prices you probably can’t sell your house today.
The advantage of liquidity is that it gives you freedom to buy and sell an asset quickly. Gold is one asset that has been given liquidity beyond the markets. You don’t have to be a trader or a gold-broker if you want to buy and sell it. This is because gold has now been monetised and ingrained into digital payments – giving it complete liquidity, as with other forms of money.
A situation where the ‘futures price’ is trading above the current spot-price. The opposite of backwardation.
This word originally comes from ‘carob bean’ via the Greek ‘keration’. The amount of carats describes the amount of gold content in an object. A carat is one 24th. The minimum marketable gold can be is 21.6 carats which equates to 900/1000 gold. 24 carat gold is around 999/1000, or 99.9% pure.
A coin whose worth is determined by the value of its component metal rather than any symbolic ‘minted’ value. A bullion coin is a way of holding gold by buying physical amounts of it from a mint.
However, it is also possible to hold spendable gold online or via your smartphone. This negates costs and concerns over storage and security and allows you to spend your gold instantly anywhere in the world, giving you complete liquidity, something not given by bullion coins because their given value does not correspond to the value of the metal that makes them up.
A bullion coin on display at the Trial of the Pyx
A bull market is one in which the general trend is up. A bull market could refer to the fate of one particular asset such as gold or copper, a sector, such as technology or commodities or the whole stock market in general.
The rise in house prices in the UK over the 2010s could be referred to as a bull market. The fact the rise is ongoing creates the phenomenon and can be seen as furthering price rises as more people want to invest in stock they see as going up, now and in the future. This fuels a bull market, as might other demands – for example the rise in Asia’s middle classes could start a bull market in gold as more people have wealth with which to buy gold, increasing demand and pushing up the price. An ongoing price rise could be referred to as a ‘bull-run’.
Ongoing bull markets, such as the one seen across the stock market over the last decade see a lot of optimism but can also lead to investor caution as they see a limit to price growth approaching. The longer a bull market goes on, the more likely it is to end. This also plays into the theory of market rotations: that the stock market is due a correction every ten years or so.
Once an investor believes a bull market has run its course they might look to buy a safer asset such as gold, which will typically hold value and very often increase in value as other areas of the market fall.
The opposite of a bull market is a bear market.
A bull is someone who generally believes a market, or an asset will go up. If you are ‘bullish’ on a certain stock you would advocate an increase in its value and seek to own a lot of it, confident that it would go up in value. If you are bullish on gold you believe it will increase in value over time and so you will buy gold to take advantage of this. You can be a bull in one asset while being a bear in another. It is also possible to be ‘bearish’ on the market as a whole, which might make you a bull for some assets that typically do well in a falling market – i.e. a bear might be a gold bull.
The term is believed to have originated in contrast to the term to be a ‘bear’ on something. A bear-skinner was always warned not to sell the skin before they had caught the bear and so a bear-skinner could be said to be shorting the market by selling it now and paying for it later at a reduced rate. By contrast the bull was introduced to as a counter image. The duo seem to have come into their own around the time of one of the first major stock market crashes: the South Sea Bubble in eighteenth century England.
A bear market is a market in which the general trend is down. If a market is contracting it can be said to have become a bear market, having previously been a bull market. A bear market is seen as a correction to a bull market, bringing prices back to a rational valuation after a protracted period of growth. A bear market can have widespread consequences as value is lost across many different assets, potentially effecting the broader economy, productivity and GDP. A bear market can become a market crash if it precipitates a sudden fall in shares and a mass sell-off of assets. The financial crashes of 1929 and 2008 could be seen as bear markets.
During a bear market some assets might go up, experiencing a bull-run. Gold is seen as a safe-haven during such times and as demand increases it will often rise in value while other assets are contracting.
A bear is someone who generally believes a market, or an asset will go down and is the opposite of a bull. A bear would typically short a stock, selling it now but purchasing it in the future as they believe it will be lower and thereby making money on a contracting market. It is possible to be a bear, or ‘bearish’ with regard to one specific asset or asset class rather than being bearish on the market as a whole.
For example, you might be bearish on the dollar, believing it could lose value because of events such as a trade war. Conversely you might therefore be ‘bullish’ on gold because you believe more people will buy gold as the dollar depreciates and they want to put their money into something they see as a safe store of value.
Click here to find out where the terms ‘bear’ and ‘bull’ originated from in finance.
The opposite of contango. A state of the market where the futures’ price of an asset is lower than the spot-price.
The chemical symbol for gold, from the Latin name for gold ‘aurum’.
In finance, traders and investors will typically refer to how much ‘alpha’ they can get. This is the margin by which a trader can beat the market. Alpha is essentially a gauge for returns: the more the better. If a market benchmark (beta) is 2% and an investor is getting 5% then they are beating the market and gaining 3% alpha.
All investors will seek ‘alpha’ but it can be an illusory concept because the ‘benchmark’ it beats could simply be a fixed-income return rather than an accurate market tracker. Likewise, a broker might say they have beaten a market returning 3% with returns of 5% giving 2% alpha but they might charge fees of 3% meaning your overall return is 2% which is actually an alpha reading of -1%.
While lots of alpha might mean great returns, it could also indicate risk and volatility. Most investment portfolios will have safe assets such as gold to offset risk. If volatility means other assets lose value to a market downturn, gold can often gain – beating the market with alpha of its own. Between 2000 and 2011 gold rose from $250 to $1900, showing significant alpha while also being one of the safest assets.
Hallmarks are the symbols, numbers and letters stamped onto a gold object such as a ring to prove its quality and provenance by an assay office. Typically on a gold ring you might see:
The Sponsor’s Mark – usually a series of initials to determine who it was that went the ring for assaying (usually the producer).
The Standard Mark – the number that determines the quality of the gold, essentially a purity rating out of 1,000.
375 = 9 carat gold
585 = 14 carat gold
750 = 18 carat gold
916 = 22 carat gold
999 = 24 carat or ‘pure’ gold
The Assay Office Mark – this is the mark of the office that ‘assayed’ the metal. The UK has four assay offices.
Date Mark: Like a car’s number plate this is done by letters. The letter for 2018 is ‘T’.
Traditional metal mark: This denotes which metal it is.
Crown = gold
Orb = platinum
Greek Head = palladium
Britannia = Britannia silver
Lion = sterling silver
An assay is a test and sign of proof of the gold’s quality. The UK has assay offices in London, Sheffield, Birmingham and Edinburgh – each assay office marks its gold with a different sign called a ‘Hallmark’. Assaying in England dates back to 1300 when Edward I ordered the quality of precious metals be tested.
Unallocated gold is gold that can be ‘owned’ but it is not gold physically set aside for you. It allows banks to sell more gold than they physically have in their vaults. The legal title to the gold may sit with the provider rather than the person who has bought the unallocated gold.
Unallocated gold makes it easy for funds and investors to quickly add gold to their portfolio but in reality, it is not the same as physically owning gold. Unallocated gold exposes you to the same risks as having your cash in the bank: if you want to redeem it you cannot and the gold that it is said to represent may well not physically be held by the bank at all.
It is now possible to own allocated gold of your own without going through such an investment – this can be done by buying physical gold and having it at home or buy purchasing allocated gold via a smartphone app which can then be spent anywhere in the world.
As opposed to unallocated gold, allocated gold is assigned entirely to its owner but kept elsewhere, usually in a vault. The benefits of holding allocated is that it cannot be lent out to anyone else or form part of a pool which prevents it from being claimed by any one individual. Having allocated gold in a vault solely with your name on it means you can redeem it entirely at any point. It also allows you to use that gold as money, because it is counted, registered and legally owned by you it can be instantly spent worldwide using a Mastercard.
Other forms of gold holdings such as having the physical metal at your home or having unallocated gold in an investment portfolio do not allow you to do this.
Bullion is an amount of precious metal not minted as a coin with a predesignated currency value. Gold bullion typically takes the forms of gold bars which are valued by their current market price. A gold ‘bullion coin’ is a coin worth the market value of its gold content rather than a monetary denomination, i.e. £5.
A central bank is the ‘sovereign’ bank of a state. The UK’s central bank is the bank of England, the USA’s is the Federal Reserve and Japan’s is the Bank of Japan. The role of a central bank is to decide on monetary policy: how much money to print and when and to decide what the interest rate should be.
Central banks have varying degrees of political independence. The Bank of England is charged by the British government to achieve inflation at 2%. If inflation moves more than 1% either side of this figure the governor of the Bank or England (currently Mark Carney) must write a letter to the Chancellor of the Exchequer.
The eurozone has a central bank to decide on the monetary policy of the euro. The European Central Bank (ECB) is based in Frankfurt.
Central banks will also have a management role in the economy, providing research, guidelines and regulations on banking in their jurisdiction as well as liaising with other central banks worldwide.
There is approximately 187,200 tonnes of gold available in the world – although estimates vary. The amount of gold increases by around 2% each year, roughly in line with the world’s population – one reason why gold always keeps its value is because the ratio of gold per person stays roughly the same. This is in contrast to other forms of money, such as paper currencies, which can be manipulated by exchange rates, the printing of more notes and quantitative easing. Gold is often seen as the oldest form of money because you cannot manipulate it in this way – it has kept its value, inflation free for millennia.
All the gold ever mined would fit inside a cube of 21 metres – meaning it could be placed underneath the Eiffel Tower or inside four Olympic swimming pools.
Nobody knows how much gold remains unmined inside the Earth’s crust. However, NASA scientists estimate there is 100 billion tonnes of inaccessible gold at the Earth’s centre.
Debasement is deliberately issuing coins of inferior metal value at the same face value. For instance, England’s Henry VIII undertook a policy of coinage debasement to save money. Essentially this means taking in all the coins and reissuing them with less valuable metal but at the same designation. Under Henry VIII and his son Edward VI, the sovereign coin fell in weight between 1544 and 1549, from 12.96g to 10.98g and from a finesse of 23 carats to 22 carats [source: The Royal Mint]. Likewise, the crown took away 83% of the silver in the penny yet still issued coins carrying the worth of ‘one penny’. By doing this they made a ‘stunning yield’ of £1.27 million (Knafo).
This difference in value between the price of the metal in a coin and the value the coin is given by the issuer (traditionally a state’s sovereign) is called ‘seigniorage’.
Seigniorage is the difference between how much it costs to make physical money and how much value that money is given by the issuer. For example, if it costs just 5p to make a £10 note the seigniorage would be £9.95. Seigniorage typically operates at a profit for the state, however, it is possible for seigniorage to happen at a loss to the state: negative seigniorage. This usually happens when the production costs and/or the value of the metal in a coin exceeds the value assigned to it by the mint. For instance, if it costs 28p to create a 20p piece then the coin has negative seigniorage because it is technically worth less than the metal in consists of.
Some collectable/investment coins are issued as ‘bullion coins’ meaning their value is essentially the value of the metal in them, therefore they have no seigniorage. For instance, at the time of writing the gold sovereign, with 7.98g of gold in would be worth approximately £237.
“Good and bad coin cannot circulate together,” Sir Thomas Gresham wrote this in a letter to the English Queen Elizabeth I on her ascension in 1558. He was referring to the debasement of English coinage carried out by her father Henry VIII. Henry had reissued coins made with base metals, this meant that even though a coin was declared by the government (or by ‘fiat’) to be worth 1 shilling, the metal in that coin was actually worth much less.
This meant the ‘good money’, made prior to debasement which contained gold and silver to the value of 1 shilling, was driven out by ‘bad money’: coins made of metals below the value of 1 shilling. This was because when people had a choice they would always use the bad coins in a transaction and retain the good coins because they knew they had more inherent value – even though the state had decreed they were both worth 1 shilling.
The ‘law’ was named retrospectively after Sir Thomas Gresham in the 19th century but it had been observed before: by famous astronomer Nicolaus Copernicus and by the Ancient Greek playwright Aristophanes.
Previously the Islamic scholar Ibn Taimiyyah (1263–1328) had written:
“If the ruler cancels the use of a certain coin and mints another kind of money for the people, he will spoil the riches which they possess, by decreasing their value as the old coins will now become merely a commodity. He will do injustice to them by depriving them of the higher values originally owned by them. Moreover, if the intrinsic values of coins are different it will become a source of profit for the wicked to collect the small (bad) coins and exchange them (for good money) and then they will take them to another country and shift the small (bad) money of that country (to this country). So (the value of) people’s goods will be damaged.”
Modern examples of the law in action were seen in the US when older, pre-1965, US half-dollar coins were allegedly hoarded by citizens as they contained 90% silver, while the newer issued coins only had 40% silver. This coin retention was further compounded by the fall in the value of the dollar which meant that eventually the coin containing silver was worth more than the half-dollar designation it had been given.
The ‘law’ is by no means definitive and academics have previously pointed to it working in reverse, usually following the tipping-point of hyperinflation. In Weimar Germany hyper-inflation saw the mark become worthless and people stopped using it as an exchange of value, using other currencies with ‘value’ or commodities instead. In such situations ‘good’ money, backed by gold or commodity value, can be said to have superseded ‘bad’ money – denominations literally not worth the paper they were printed on.
Gresham’s Law is generally seen as a clumsy when applied to the history of currency. Typically, stronger ‘good’ money has driven out weaker ‘bad’ currency. This goes right back to the widespread use of the Persian daric or Roman denarius in the ancient world, through to the Venetian ducat in the Middle Ages. This was due to trade hegemonies but also the quality of the money itself – the coins being made of gold or silver worth the value of the monetary denomination. They could be trusted abroad and at home. More recently the pound and dollar were seen as ‘good’ money when backed by the gold standard.
However, Gresham’s Law is helpful in defining the phenomenon of ‘good’ and ‘bad’ money and demonstrates the deficit in value between money that is secure and backed by value such as economic strength, acceptability, known value (gold). Compared to money that is only a representation of state fiat.
A bank run (also known as a run on the bank) occurs when a large number of customers look to withdraw their deposits in unison due to concerns about a bank’s solvency (the ability of an institution to meet its long term financial obligations) leading to a capital flight.
A capital flight (or flight of capital) takes place when customers transfer funds from their account to a separate institution or demand to withdraw their assets in cash. In a fractional-reserve banking system where banks only keep a small proportion of their assets as cash, banks must liquidate loans in order to meet the demand for withdrawal. As these withdrawals increase, it tends to create a snowball effect and the probability of the bank defaulting increases as a general feeling of consternation rises. These situations can destabilise the bank such that they can run out of cash and ultimately face bankruptcy, the event at which a bank can no longer repay their outstanding debts.
As a result, banks may limit the amount of cash that can be withdrawn by a customer, suspend withdrawals altogether or acquire more cash from other banks and/or the central bank to help prevent a bank run.
Bank runs during the Great Depression
During the Great Depression banking panics set in as numerous bank runs hit a myriad of financial institutions. Beginning in the Upper-South in November 1930, corresponding networks began to fall apart as a string of banks in Tennessee and Kentucky collapsed a year after the stock market crash. These bank runs then grew to envelope almost all of the United States creating a systemic banking crisis leading to a 50% plunge in international trade and a rise in unemployment by 25%.
Bank runs today
In the past decade, we have seen bank runs across the world. For example:
Northern Rock (United Kingdom) – The global banking crisis which began in 2007 meant that Northern Rock was unable to produce income as expected from its loans and was at risk of being unable to repay the amounts it had borrowed. The news that the bank had approached the government for support led, within 24 hours, to a public lack of confidence and concern that savings were at risk. The bank failed following a bank run as people rushed to withdraw their savings. It was the first British bank in 150 years to fail due to a bank run.
Countrywide Financial (United States) – After notifying the US Securities and Exchange Commission (SEC) that the secondary mortgage markets could hurt the bank financially, people began to speculate Countrywide was a potential bankruptcy risk. On August 10th 2007, a run on the bank began as the secondary mortgage market shut down, curtailing new mortgage funding.
Although your money is held in a bank and is essentially ‘on demand’ constantly, banks do not hold enough money to pay out everyone who holds money with them if they all wanted to withdraw all their money at the same time. This is because banks will keep a small portion of your money and loan out the rest. They charge interest on these loans which is how they make money. So, technically your savings could be forming part of several different loans without your knowledge.
In 2007 people holding their money with British bank Northern Rock panicked and there was a ‘run’ on the bank. People went to the bank to withdraw all their money in person, as was their right, because they didn’t trust that the bank wouldn’t lose it due to its poor investment and loaning decisions that had exposed it to toxic debt.
It is important to realise that on the bank’s balance sheet, they view deposits – including your deposit – as a liability and the loans they have made to others as their assets. If enough people default on their loans, this may affect the ability for the bank to return your deposit. Historically, in times of crisis, the government has stepped in to bail out banks and ,up to a certain limit, covers your individual savings. This is currently £85,000, under the financial services compensation scheme.
Since 1973, on average gold has risen 9.6% (year on year). This is an average, so it cannot be said to happen every year. Gold is understood to keep its value over time, so it is worth comparing this figure to the inflation of other currencies over the same amount of time.
One statistic that is worth remembering is that if you had put £100 in the bank every month for the last 20 years, you would now have £24,000. If you had bought £100 worth of gold every month you would now have gold worth £50,000. This simple fact demonstrates the power of gold to beat inflation and help you keep your wealth through your lifetime, saving and spending it efficiently and being able to pass it on to future generations.
If you take a smaller time frame, then on average gold has risen 3.7% per year since 1980.
There are several ways to protecting your savings from inflation
- Invest in real assets – assets that will increase in value with inflation, such as gold, or higher risk ‘alternative assets’ such as property or art.
- Invest in equities that pay reliable dividends – conditional on companies passing on higher costs and prices to consumers, but this may be challenging and could cause a reduction in consumer spending, in turn reducing profits, and dividends. Commodity resource companies can combat this, as they can increase prices with inflation. Commodity prices are very volatile, however, so they may be vulnerable.
- Reduce exposure to bonds – if gilts/corporate bonds pay a fixed income, inflation will reduce the real value of this income. There are inflation linked bonds that can combat this but are less lucrative.
- Protect pensions – choose an inflation-indexed annuity, rather than a level annuity, which will prevent inflation affecting your pension. Although, these have a lower level of income due to the lower risk.
- Use your full ISA allowance to prevent paying income tax on savings, or a lifetime ISA, which has a higher tax free allowance. The rates for the ISAs are low however so will not provide the greatest return on your investment.
With gold being one of the best ways to protect savings from inflation, the new accessibility of gold using Glint allows you to prevent inflation from reducing the real value of your savings. The ease of investing in gold with Glint makes this a viable solution to the problem of inflation.
The world officially came off the gold standard in 1971, when President Nixon took the dollar, which was and remains the world’s reserve currency, off its peg to the value of gold meaning it could ‘float’ in value compared to other currencies. Prior to this the value of the dollar was pinned as $35 per troy ounce of gold. The movement of the dollar off the gold standard meant widespread currency fluctuations as the dollar depreciated and the price of gold rose. Spending to pay for the Vietnam war and the accompanying inflation saw gold rise to $880/oz by January 1980 when the Soviets marched into Afghanistan.
Prior to what became known as ‘The Nixon Shock’, the UK came off the gold standard at the outbreak of the First World War.
Anything could be used to fix the value of currency and in the past other metals, such as silver, have been. Gold, however, has always been seen as the best. Universally it is seen as the best possible store of value.
Every country will have a national ‘central bank’ which will hold reserves to back their currency. Typically, this includes other currencies such as dollars, euros and yen but central banks, almost without exception, still hold large amounts of gold.
Systemic risk is a factor of risk within a system that has the potential to bring down the entire system. In financial terms it is used to imply that there is an inherent risk in a system that if unchecked could stop the entire functionality of that system.
In the financial crisis that shook the world in 2008, the crash stemmed from a series of failures that harboured systemic risk. The failure of banking organisations such as Northern Rock and Lehman Brothers implied systemic risk because it affected the entire global economy. That measure of risk compelled governments to act, intervening in the economy; namely to save banks that were considered ‘too big to fail’ such as RBS with bailouts funded by the taxpayer.
Systemic risk is different to systematic risk which is the inherent vulnerability of the entire system to volatility, or ‘market risk’. Systemic risk is an individual risk to which the system is exposed: i.e. were RBS to fail it would pose a systemic risk to the financial system.
Such was the level of bank bailouts following the financial crash of 2007/2008 that it is difficult to see such levels of government financial support happening again. The UK government bailed out RBS and Lloyds bank, part nationalising them in the process. The Chancellor at the time, Alistair Darling, made £200 billion available via a liquidity fund.
The government bailed out Lloyds with £20.3 billion initially, reclaiming £21.2 billion eventually following a sale of shares in 2017. However, the £45 billion with which the government bought 73% of RBS may not be recovered and the state has been making provisions for such losses in their public accounts. The government is currently said to be sitting on a loss of £26 billion but has still said it will seek to sell its stake by 2019 regardless.
Last year an article in The Guardian said “the reported losses hide the true extent of the problems inside the Edinburgh-based bank, because they have been offset by the cash RBS has continued to generate since its £45 billion rescue. The total cost of disastrous lending, over-paying for takeovers, fines and legal bills actually tops £90 billion.”
Such is the public temper against banks that such measures in the future would undoubtedly be unpopular. However, if account holders’ assets are at risk the state may feel it has no option but to underwrite peoples savings by keeping a bad bank afloat with a bailout. Therefore, future bailouts cannot be discounted.
Both RPI and CPI are measures of inflation, RPI stands for retail price index and CPI for consumer price index. The essential difference is in how they are calculated. RPI takes a simple average, or arithmetic mean, by adding up the price of certain items and then dividing by the number of those items.
CPI uses a geometric mean to identify the factor by which prices have increased. This involves multiplying the numbers, rather than adding them up, and then finding the ‘nth root’. If it is just two numbers this would be the square root, if it is three number it is the cube root and so on.
The advantage of this method is that the mean is not distorted by the large numerical increases. However, it is therefore typically lower than the mean used in RPI, which reflects how much more people are likely to be spending overall, rather than per product.
The difference between the two is very useful for governments, who like to peg pay rises to CPI, currently 2.5%, and tax incomes to RPI, currently 3.6%.
Shrinkflation is a means of inflation where, rather than the price of a product increasing, the size, and therefore value, of the product decreases. A good example is chocolate bars: in 2014 a Toblerone gave you 200g of chocolate. In 2018, it gives you 150g – revealing shrinkflation of 25%.
Shrinkflation is often a way of for manufacturers to pass on the rising cost of production (often due to inflation) to their customers. It’s important to remember that while the size of a product decreases it doesn’t guarantee the cost will stay the same – it will often go up.