Apparently, there’s already a minor gold-backed currency under development. Zimbabwe, a country that has yet, since obtaining independence in 1980, to create a stable currency with any lasting value – has stated that it plans to create a new, gold-backed currency. The new currency would replace the ailing ZWL, which currently has an exchange rate with the US dollar of 20,000:1. (If you’ve worked hard and managed to save up a million Zimbabwe dollars, you’re still not quite ready to retire – as that’s only equal to $50US.) No specific timetable, however, has yet been unveiled regarding the launch of Zimbabwe’s proposed gold-backed currency.

Where Will a Gold-Backed Currency Arise?

Rumors of the possible impending creation of a major gold-backed currency continue to multiply in both number and intensity.

CHINA - The most frequently mentioned candidate for becoming a gold-backed currency is the Chinese yuan/renminbi. Another option is for China’s central bank, the People’s Bank of China (PBC), to create an altogether new Chinese currency backed by gold. China has had its central bank buying up gold at a record pace for several years. Having massive gold reserves would enable China to create a gold-backed currency that has strong value right out of the gate.

BRICS - Other rumored possible gold-backed currencies include a new currency that would be launched as sort of a “joint venture” by the BRICS nations. Back in the summer of 2022, rumors of a gold-backed BRICS currency were flying hot and heavy as, apparently, that was a major topic on the table for discussion at a scheduled BRICS group meeting. Apparently, however, the project didn’t get the green light at that meeting, since I haven’t seen a BRICS-launched, gold-based currency emerge in the meantime. Nonetheless, talks within the group about creating such a currency continue.

CHINA AND RUSSIA - A third possibility is a possible smaller collaboration – between just Russia and China – to develop a gold-backed currency. Russia and China have definitely made major moves to strengthen their trade relationships and increase their level of economic cooperation.

The economic sanctions that the US-led West imposed on Russia following the outbreak of the war with Ukraine have accomplished little other than driving Russia further into the welcoming economic arms of the Chinese. The sanctions have also spurred renewed determination among Russia, China, and the other BRICS nations to drastically reduce their financial exposure to the US dollar.

RUSSIA AND IRAN - Alongside rumors about Russia and China working together to create a gold-backed currency are more recent rumors about, alternatively, a Russia-Iran partnership for the same purpose. Personally, I have significant doubts about the likelihood of a gold-backed currency arising from either of those possible partnerships. Russia and China have, indeed, been close economic partners going all the way back to the days of Mao and Stalin. However, that economic cooperation has never completely erased a lingering overall mistrust that exists between the two countries. Likewise, I have a hard time envisioning Iran cozying up close enough to Russia to create a joint currency. If it’s going to be a case of partnerships, then I think a broader base of economic partners, such as the BRICS nations, is more likely to serve as the launchpad for a gold-backed currency.

Of all the possible origin points for a major gold-backed currency, I still think that China is the best bet.

THE WEST - But let’s not overlook the possibility of the US and other major economies, perhaps working in cooperation with the World Bank, coming up with some plan for a “Great Financial Reset” (to take care of their massive debt problem) that involves a return to the gold standard. That possibility has arisen primarily from speculations about the reason for the US and other major Western nations – historically, massive sellers of gold – suddenly becoming large buyers of the yellow metal.

What is a Gold-Backed Currency? – Understanding the Gold Standard

Up until 1971, when US President Richard Nixon ended the gold standard and ushered in the age of purely fiat currencies, all of the world’s major currencies – such as the US dollar and the British pound – were backed by gold.

When operating on a gold standard, a nation’s currency has real value by virtue of being backed by a hard asset – namely, gold. Citizens can go to a bank and exchange any paper currency notes they have for an equivalent amount of gold. The total value of all of the currency notes that a nation issues, its money supply, is determined by – and limited by – the total amount of gold reserves it holds. While the gold standard was still in effect, part of the reason for the United States being the world’s pre-eminent economic power was the fact that it had the largest amount of gold reserves.

The beginning of the end of the gold standard wasn’t the official abandonment of it in 1971, but, rather, goes back to 1934, when President Franklin Roosevelt confiscated all the gold coins and bullion owned by US citizens. FDR used an obscure law to issue Executive Order 6102, which required everyone to hand over to the government any and all gold coins or bullion that they had.

In exchange for their gold, people received paper currency notes at an exchange rate that represented gold valued at $20.67 an ounce. Once it had everyone’s gold, the US government promptly turned around and, through the Gold Reserve Act of 1934, set the value of gold at $35 an ounce. In effect, the government had just ripped off all of its citizens for roughly half of the true value of the gold that they had previously owned, devaluing all the paper money replacements they now had by about 40%.

The bold nature of this massive government heist, once you cut through all the smoke and mirrors, is really quite staggering. In essence, what happened was this:

• One day, the government declared that the value of the gold that you owned – the gold that it was demanding that you exchange for paper money, threatening you with fines and/or prison if you refused to comply – was $20.67 an ounce
• The next day, when the government owned all the gold, it declared that gold – that same gold that it had just told you was only worth $20.67 an ounce – now had a value of $35 an ounce

The purpose of this monetary scam perpetrated on the American people was to require less gold to back the total amount of US currency, thus enabling the Federal Reserve to print more money. The resulting increase in the nation’s monetary supply helped to pay for FDR’s massive “New Deal” programs.

Prior to the gold confiscation act, US currency notes read, at the bottom, the denomination of the note – such as $100 – followed by the wording, “in gold coin payable to the bearer on demand”. In fact, US paper currency was, at that time, referred to as “gold certificates”. (Smaller denominations, such as a $1 bill, were “silver certificates”. Yeah, you could walk into a bank any time, hand them a $1 bill, and get yourself a nice, shiny silver dollar in exchange. Of course, you can still get a US silver dollar – a Silver American Eagle coin – but you’ll have to fork over about $35 or $40 in those cute, little Federal Reserve Notes for it.)

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After the US federal government had confiscated all the gold held privately in the country, all future currency notes had that “payable in gold coin” bit removed, replaced with just the label, “Federal Reserve Note” (meaning, essentially, “This is just a piece of paper issued by the Federal Reserve.”).

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Why was the gold standard abandoned? – Because the government wanted the ability to do what it does now: print money at will and borrow all the money in the world that it wants to, up to and beyond $34 trillion. Under a gold standard, massive government borrowing like that simply isn’t possible, because the government cannot issue an amount of paper money that totals significantly more than the total value of its gold reserves. If it’s only got, for example, $500 billion in gold, then it can’t print more than $500 billion in currency notes.

The “Greater Fool” World of Fiat Currency

Today, all the world’s currencies are fiat currencies, not backed by gold or anything else. Fiat currencies are, essentially, only valued relative to other currencies – for example, what is the value of US dollars relative to Australian dollars. Several currencies have their value pegged to the US dollar, but the US dollar isn’t pegged to anything.

The value of a fiat currency is ultimately dependent on how much trust people – or nations – have in the financial stability of the government that issues the currency.

The world of fiat currency is sometimes referred to as the “Greater Fool Theory” of monetary value. How successfully can you persuade other people, or other nations, that your country’s currency is worth what you claim it’s worth? Can you continually convince people that, for example, they should hand over $1.30 worth of their own currency in exchange for $1.00 of your currency?

For the moment, the US government still has most of the world convinced that US dollars have a high value. However, as the US debt spirals to virtually unimaginable levels and the fires of inflation roar through the country, the value peg occupied by US currency appears ever more precarious, and the possibility of a massive devaluation occurring at some point begins to grow.

Gold-Backed Cryptocurrencies

Gold-backed cryptocurrency is simply the gold standard applied to the world of digital money. Linking a relatively new digital financial asset to a well-established and trusted hard asset such as gold can be a smart move for a cryptocurrency that wants to distinguish itself from the ever-growing pack of digital assets. Tying the value of a cryptocurrency to gold notably reduces its exposure to one of the oft-noted risks of cryptocurrencies – extreme volatility – and provides it with some substantial stability.

Interest in gold-backed cryptocurrencies among investors has been steadily increasing over the past several years. In 2022, the CEO of Matador Gold Technologies, Devon Soni, stated his firm belief that gold-backed cryptocurrencies would be adopted on a broad scale within the foreseeable future. And last year, the Texas legislature was eyeing proposals to launch a state-sponsored gold-backed crypto asset.

A gold-backed cryptocurrency offers investors several notable advantages, including the following:

• Because each coin or token of a gold-backed crypto represents a specified amount of gold, they have, like gold, an intrinsic value, rather than just some arbitrary speculative value
• The ability to easily exchange your cryptocurrency coins for gold gives them greater liquidity than other crypto tokens that may or may not garner significant demand
• Gold-backed cryptocurrency offers advantages to gold investors as well as to crypto investors – for example, holding gold in the form of a digital asset eliminates worries associated with storage and storage costs (One note on storage: The gold used to back a cryptocurrency does need to be stored, and its presence in the storage facility regularly audited. Any questions about the transparency or trustworthiness of such audits could, obviously, have a negative impact on the cryptocurrency’s value. Saying your cryptocurrency is backed by gold is only meaningful if the gold actually exists.)

The Top 3 Best Gold-Backed Cryptocurrencies

There are several gold-backed cryptocurrencies, and several factors that can be considered in evaluating them. Key points of comparison include things such as the perceived trustworthiness and financial stability of the issuer, transparency, liquidity, and gold storage security.

Without further ado, and in no particular order, the following are my picks for the top 3 best gold-backed cryptocurrencies:

1. Tether Gold (XAU): Tether Gold was created in 2020 by Tether, a popular cryptocurrency in its own right. It currently boasts a market cap in excess of $550 million. Each Tether Gold token is backed by one troy ounce of physical gold, which is stored in vaults in Switzerland. Vault audits are freely available on the XAU website. From the Tether Gold website – “All physical gold that backs XAU tokens can be tracked on our website. At any point in time, you can verify your gold allocation in our vaults.” Investors can exchange their Tether Gold for physical gold or cash. XAU tokens can be traded 24/7/365 on any of the more than a dozen cryptocurrency exchanges that list the XAU token.  XAU is DeFi-compatible, which enables yield farming on various platforms (Note: Tether also offers a silver-backed cryptocurrency – XAG – with each token backed by one ounce of fine silver.)
2. PAX Gold (PAXG): Pax Gold was created on the Ethereum blockchain by the Paxos Trust Company in 2019. Each PAXG token represents one fine troy ounce of a London Good Delivery gold bar. The Paxos Trust Company is also the founder of ItBit, which holds the distinction of being the first bitcoin trading exchange licensed by the New York State Department of Financial Services. The gold that backs each Pax Gold token is stored in London, in Brinks’ vaults, and is audited monthly. (Note: Brinks is also one of the select gold storage companies approved by the IRS for use with a Gold IRA.) PAX Gold is traded through multiple cryptocurrency exchanges and brokerage firms. The tokens are redeemable for either cash or physical gold.
3. Aurus (AX) : From the Aurus website – Aurus was founded in 2018 on the belief of opening the precious metals market to everyone, with the conviction to collaborate with traditional market participants, empowering them with the tools and technology necessary to make precious metals accessible assets worldwide. Today, Aurus is leveraging metal-backed blockchain technology to help gold, silver and platinum businesses democratize these assets via the digital economy while earning passive rewards in the digital assets & DeFi space. Aurus and its distributors offer three metal-backed tokens: tGOLD, tSILVER and tPLATINUM. Each token is 1:10 backed by 1 gram of physically allocated gold, silver or platinum. Aurus tokens represent full ownership of the underlying metals and can be redeemed at any time. 

Direct Bullion are one of the founding partners with Aurus - get in contact with Direct Bullion London for any questions on how you can get involved here: https://www.directbullion.com/

The Top 3 Best Gold-Backed Cryptocurrencies – Summary

There appears to be an increasingly strong impetus, all across the globe, for the creation of a gold-backed currency. Cryptocurrency, a financial asset that is ever on the leading edge of monetary development, has already forged ahead in this arena with the creation of several gold-backed cryptocurrencies.

Combining the historical value of gold with the financial innovation of cryptocurrency offers an enticing prospect to investors who are always looking for creative ways to further diversify their investment portfolio. As you should do with any investment, always conduct your own research and do your own due diligence before investing in any cryptocurrency or gold-backed financial asset.

• J.B. Maverick

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Sources:

https://nomadcapitalist.com/finance/gold-backed-currency/

https://en.wikipedia.org/wiki/Executive_Order_6102

https://www.linkedin.com/pulse/ultimate-guide-gold-backed-cryptocurrencies-shuhaib-shariff

https://www.datawallet.com/crypto/best-gold-backed-cryptocurrency

https://primexbt.com/for-traders/gold-backed-cryptocurrency/

https://globalbullionsuppliers.com/en-us/blogs/blog/how-does-a-gold-backed-currency-work

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https://www.usmoneyreserve.com/news/executive-insights/is-a-new-gold-backed-currency-on-the-way/

https://www.foxbusiness.com/economy/russia-china-may-be-preparing-new-gold-backed-currency-expert-assures-us-dollar-safest-currency-today

https://kinesis.money/gold/

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https://dailyreckoning.com/the-world-is-ganging-up-against-the-dollar/

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