Many moons ago, there used to be a Barter System using which parties used to exchange goods and services. Then, there came a commodity money system, in which commodities such as Gold, Silver, Dates, Tobacco, etc. were used as a medium of exchange by different civilizations. Later on, with the emergence of paper in 100 BC, a new currency system called paper money was adopted as a medium of exchange because of its easy movability and printability.
Since the birth of paper currency, the risk of overprinting has always been associated with it in different critical conditions such as natural crises, financial crises, wars, or high budgetary deficits, etc. it must be noted that whenever overprinting of paper currency happens, more devaluation occurs due to the oversupply of paper money in the economy. Such devaluation ultimately causes a fall in the purchasing power of money, which further causes the prices to bob up making life for the lower and middle class more exorbitant due to the rise in inflation.
In addition to trillions of dollars of losses, the crisis of the Covid-19 pandemic has once again exposed the major drawback of paper currency, which is its inflationary behavior due to its easy printability out of thin air with no proper limitations or mechanism. To better understand this matter, I would take into consideration the analysis of the value of the USD Index during the COVID-19 period.
The first case of coronavirus was reported on 20th January 2020 in the Pacific Northwest State of Washington, US, which then spread all across the US. Therefore, due to the continuous lockdown and standstill of the US economy, the Federal Reserve Bank, a US Central Bank, had to excessively print new dollars to support different sectors of the US economy suffering from the COVID -19 Pandemic. The excessive printing ultimately surged the assets in the Balance Sheet of the US Federal Reserve Bank (Fed) by 43.75 percent from 4.14 trillion on 20th January 2020 to $7.36 trillion on 29th December 2020. The Fed’s assets are comprised of the purchased government’s debt securities, which government uses to support its necessary operations, and the loans. Hence, as a result of 43.75 percent of printing during the pandemic, the dollar value against the basket of six major currencies had devalued by 8.4 percent as evident from the fall in the value of the US Dollar Index (DXY) from 97.53 on the 21st January 2020 to 89.99 on 29th December 2020.
Although, the dollar value declined during the COVID -19 pandemic the prices of hard/commodity money such as gold and silver appreciated. The value of gold per ounce had topped up by 17.14 percent from $1556 on 21st January 2020 to $1878 on 29th December, 2020 and the Silver per ounce had upsurged by 32.16 percent from $17.76 on 21st January 2020 to $26.18 on 29th December 2020. This shows that due to the devaluation of the dollar during the pandemic as a result of whopping printing the investors could have changed their investment behavior and shifted investment from the declining dollar to the all-time safe heavens such as Gold and Silver. Similarly, according to the RJO Futures Senior Commodities Broker Daniel Pavilions:
“The metals are going up in price due to the printing up of money”
This means it can be stated that the stupendous printing of paper money by the central banks during the pandemic caused the devaluation of the dollar and increased the demand for hard money in order to secure investments and wealth. That is why a specific division of the financial community around the globe insists on gold and silver as to be the all-time safe heavens and also expects that the sometime in future the world may re-adopt gold and silver as a reserve currency system and avoid paper money due to its inflationary behavior.
References:
1) https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm (Federal Reserve Bank Balance Sheet).
2) https://www.wsj.com/market-data/quotes/index/DXY/historical-prices (US Dollar Index Values from 20/01/2019 to 20/09/2019.
4) https://www.usagold.com/daily-gold-price-history/?ddYears=2020 (Price of Gold per ounce from 20/01/2020 to 20/09/2020.
5) https://www.usagold.com/daily-silver-price-history/?ddYears=2020 (Price of silver per ounce from 20/01/2020 to 20/09/2020.
