Bold Bullion Bars

Blueprint for a gold bank

Throughout history gold has been used in transactions and as a form of savings. Today, using gold to make payments is no longer practised in the Western world, many argue this is due to the impracticality of using the precious metal. However, this no longer need be the case. Below, Ralph Hazell, explains how your gold investment could one day turn into a means for making payments in a number of ways.

Electronic gold: The combination of the internet, electronic payment systems, and gold are a game changer for the banking system

One of the reasons that paper money started was that it was more convenient than carrying around gold. You find this in Europe in the late 16th century in Venice. You might have deposited your gold coins with Banco della Piazza di Rialto, which was a state run bank set up to facilitate trade through paper transactions rather than actual coins. On depositing your gold, the bank would have given you notes, or a bill of exchange, which you could use to purchase goods with, on the basis that these notes could then be cashed in for gold coins, or the new owner of the notes would deposit the notes back with the issuing bank in the knowledge that the gold equivalent was in their “account” with the bank.

Fast forward to 2012, we have a similar system of carrying notes and coins around, we also have internet banking and card processing through companies such as Visa and Mastercard, but we also have online payment systems such as PayPal. But the big difference is that the paper or digital money is not convertible into gold, it is what is called “fiat money” which basically means it is backed by nothing and its prevailing purchasing power depends on the confidence in the issuing central bank to maintain a stable currency.

We can make payments through all these different mediums with all sorts of government sponsored currencies such as Pounds Sterling, US dollars and Japanese Yen. Surely it is a good for people to be able to make payments in gold or its digital, fully backed equivalent? Another currency could then compete for our savings and transactions. Who could possibly argue that this is not a good addition to the global monetary system?!

The two key roles of money are as a medium of exchange, and equally as a store of value for people’s savings. This can work in exactly the same way as it has throughout history. Gold is stored somewhere, an approved vault with ViaMat, except payments are made digitally rather than with paper.

So how can this work in practise?

Online gold payments:

Digital payments with gold have been in operation since the early internet days. The technology for making a payment for something with digital gold is very similar to how PayPal operates with global currencies. The challenge is the credibility of the provider.

Card processing:

This is a bit more complicated, as we might be a few years off from Mastercard and Visa processing payments in gold, however you could easily have a debit card that is linked to a gold account, and whenever a payment is made, gold leaves the gold account and pounds (or a currency of your choice)are paid out through the card payment system.

Mobile phone:

This would be similar to online peer to peer (P2P) payments, where you don’t have the added problem of having to go through the payments system, or Visa or Mastercard. The vendor and purchaser would simply need to be part of the same gold network. Whether the payment is a transfer instruction given on their phone or a contactless type payment that sends an instruction to make a payment, the transaction can be seamless.

A Gold bank account:

The most attractive part of using gold as an alternative to conventional currencies is that you can save in gold. This would be in a fully backed environment, not through the unstable fractional reserve system (that Mervyn King so publicly criticised in 2010). If the customer owns 200 grams of gold, then all of that gold is set aside for him; he owns it completely free of any counterparties.

For instance, when you choose to buy gold with The Real Asset Co, at the point of the transaction, there is some gold in a vault that you own. You can manage and view this online like with your bank account. Because gold is a very efficient and liquid market, you can buy and sell your gold within a very efficient trading spread.  By people owning gold this way, as they have for hundreds of years, it diversifies the risk away from government issued currencies, which means more liberty and choices for those people.

One institution providing all of these elements together could become a blue print for a gold banking system. It should function pretty much like a normal bank account, with a debit card that is accepted all over the world. The only difference is that your core holding is gold rather than dollars, pounds or euros.

Gold banking is as simple as that. What are we waiting for?

But when you recall that one of the first moves by Lenin, Mussolini and Hitler was to outlaw individual ownership of gold, you begin to sense that there may be some connection between money, redeemable in gold, and the rare prize known as human liberty – The Hon Howard Buffet, 1947.

About the Author

Ralph HazellRalph is CEO of The Real Asset Company, and was previously a trader and market maker in the fixed income and commodity markets for over 10 years. He was a founding partner of Trafalgar Financial Futures in Gibraltar, and of Jebel Tariq Trading in Dubai, which was the first company to automate market making in gold futures on the DGCX Dubai Gold and Commodities exchange. He is passionate about gold’s vital role within the financial system, and has been investing in gold since 2000. He set up The Real Asset Company as a service he would choose himself.View all posts by Ralph Hazell

  • roy Chambers

    Guess what its a lot easier than than – and you wont have to put it in the bank.
    Take out the little tracking thread in the Fed Reserve notes, and replace with a ribbon of Gold or silver depending on the denomination. That way gold or silver circulates in paper that has true value. Make em Greenbacks while your at it and even Ron Paulites would be happy. The money would be in the hands of the holder. Real, and private

    • Ralph Hazell

      Hi Roy,

      I like your suggestion – this could combine well with digital payments.

  • Robert LeRoy Parker

    Why do we need to use gold as a medium of exchange? 99.9% of the people in the world are absolutely content with using digitized paper currency units for that purpose.

    Throughout history gold banking leads to gold credit which leads to fractional reserve gold banking which leads to suspension of convertibility which leads to fiat currency. Eventually easy money is abandoned in favor of hard money and eventually hard money is abandoned in favor of easy money.

    Going through this cyclical process over and over is self defeating. Gold’s highest function is as a wealth reserve, a vehicle of savings. Digitized monetary units highest function is as a medium of exchange. Separating the medium of exchange and store of value functions of money is the better solution.

    People need to save in gold and transact with fiat. Gold credit should be outlawed so that the wealth reserve par excellence is not continuously debased as it is currently via the LBMA.

    There is no doubt that gold convertibility needs to be decree, but encouraging gold as a medium of exchange is a slippery slope that has historically ended badly for economic participants.

    • Ralph Hazell

      Hi Robert,

      I think any form of banking whether its based on fiat or a backed currency system can lead to fractional reserve banking if it is allowed to.

      I do think that the ability to easily save in gold is more important than being able to use it as a medium of exchange.

      Watch our interview with Douglas Carswell MP, where he suggests competing private currencies alongside the existing system, which I think is a likely scenario.

  • Pingback: Digital Gold is the Game Changer()