Currency and the Collapse of the Roman Empire
At its peak, the Roman Empire held up to 130 million people over a span of 1.5 million square miles.
Rome had conquered much of the known world. The Empire built 50,000 miles of roads, as well as many aqueducts, amphitheatres, and other works that are still in use today.
Our alphabet, calendar, languages, literature, and architecture borrow much from the Romans. Even concepts of Roman justice still stand tall, such as being “innocent until proven guilty”.
How could such a powerful empire collapse?
The Roman Economy
Trade was vital to Rome. It was trade that allowed a wide variety of goods to be imported into its borders: beef, grains, glassware, iron, lead, leather, marble, olive oil, perfumes, purple dye, silk, silver, spices, timber, tin and wine.
Trade generated vast wealth for the citizens of Rome. However, the city of Rome itself had only 1 million people, and costs kept rising as the empire became larger.
Administrative, logistical, and military costs kept adding up, and the Empire found creative new ways to pay for things.
Along with other factors, this led to hyperinflation, a fractured economy, localization of trade, heavy taxes, and a financial crisis that crippled Rome.
The major silver coin used during the first 220 years of the empire was the denarius.
This coin, between the size of a modern nickel and dime, was worth approximately a day’s wages for a skilled laborer or craftsman. During the first days of the Empire, these coins were of high purity, holding about 4.5 grams of pure silver.
However, with a finite supply of silver and gold entering the empire, Roman spending was limited by the amount of denarii that could be minted.
This made financing the pet-projects of emperors challenging. How was the newest war, thermae, palace, or circus to be paid for?
Roman officials found a way to work around this. By decreasing the purity of their coinage, they were able to make more “silver” coins with the same face value. With more coins in circulation, the government could spend more. And so, the content of silver dropped over the years.
By the time of Marcus Aurelius, the denarius was only about 75% silver. Caracalla tried a different method of debasement. He introduced the “double denarius”, which was worth 2x the denarius in face value. However, it had only the weight of 1.5 denarii. By the time of Gallienus, the coins had barely 5% silver. Each coin was a bronze core with a thin coating of silver. The shine quickly wore off to reveal the poor quality underneath.
The real effects of debasement took time to materialize.
Adding more coins of poorer quality into circulation did not help increase prosperity – it just transferred wealth away from the people, and it meant that more coins were needed to pay for goods and services.
At times, there was runaway inflation in the empire. For example, soldiers demanded far higher wages as the quality of coins diminished.
“Nobody should have any money but I, so that I may bestow it upon the soldiers.” – Caracalla, who raised soldiers pay by 50% near 210 AD.
By 265 AD, when there was only 0.5% silver left in a denarius, prices skyrocketed 1,000% across the Roman Empire.
Only barbarian mercenaries were to be paid in gold.
With soaring logistical and admin costs and no precious metals left to plunder from enemies, the Romans levied more and more taxes against the people to sustain the Empire.
Hyperinflation, soaring taxes, and worthless money created a trifecta that dissolved much of Rome’s trade.
The economy was paralyzed.
By the end of the 3rd century, any trade that was left was mostly local, using inefficient barter methods instead of any meaningful medium of exchange.
During the crisis of the 3rd century (235-284 A.D), there may have been more than 50 emperors. Most of these were murdered, assassinated, or killed in battle.
The empire was in a free-for-all, and it split into three separate states.
Constant civil wars meant the Empire’s borders were vulnerable. Trade networks were disintegrated and such activities became too dangerous.
Barbarian invasions came in from every direction. Plague was rampant.
And so the Western Roman Empire would cease to exist by 476 A.D.
About the Money Project
The Money Project aims to use intuitive visualizations to explore ideas around the very concept of money itself. Founded in 2015 by Visual Capitalist and Texas Precious Metals, the Money Project will look at the evolving nature of money, and will try to answer the difficult questions that prevent us from truly understanding the role that money plays in finance, investments, and accumulating wealth.
The Impact of COVID-19 Shutdowns on the Gold Supply Chain
Chains are only as strong as their weakest link. The COVID-19 shutdowns affected every link in the gold supply chain, from producers to end-users.
How COVID-19 Shutdowns Impact the Gold Supply Chain
Chains are only as strong as their weakest link—and recent COVID-19 shutdowns have affected every link in the gold supply chain, from producers to end-users.
Increased investor demand for gold coupled with a constrained supply has led to high prices and a bullish market, which has been operating despite these pressures on the supply chain.
Today’s infographic comes to us from Sprott Physical Bullion Trust and it outlines the gold supply chain and the impacts COVID shutdowns have had on the gold market.
The Ripple Effect: Stalling a Supply Chain
Disruptions to the gold supply chain have rippled all the way from the mine to the investor:
Some gold mines halted production due to the high-risk to COVID-19 exposure, reducing the supply of gold. In many nations, operations had to shut down as a result of COVID-19 based legal restrictions.
Strict travel regulations restricted the shipment of gold and increased the costs of delivery as less air routes were available and medical supplies were prioritized.
Refineries depend on gold production for input. A reduction in incoming gold and the suspension of labor work shortened the supply of refined gold.
- Metal Traders
Towards the other end of the gold supply chain, traders have faced both constrained supply and increased cost of delivery. These increased costs have translated over to end-users.
- The End Users
Higher demand, lower supply, and increased costs have resulted in higher prices for buyers of gold.
Gold: A Safe Haven for Investors
As the virus spread around the world threatening populations and economies, investors turned to safe-haven investments such as gold to hedge against an economic lockdown.
This increase in investor demand affected the four primary financial markets for gold:
- Futures Contracts:
A futures contract is an agreement for the delivery of gold at a fixed price in the future. These contracts are standardized by futures exchanges such as COMEX. During the initial periods of the pandemic, the price of gold futures spiked to reach a high of US$70 above the spot price.
- Exchange-Traded Funds (ETFs):
An ETF is an investment fund traded on stock exchanges. ETFs hold assets such as stocks, bonds, and commodities such as gold. From the beginning of 2020 to June, the amount of gold held by ETFs massively increased, from 83 million oz to 103 million oz. The SPDR Gold Trust is a great example of how the surge in ETF demand for gold has played out—the organization was forced to lease gold from the Bank of England when it couldn’t buy enough from suppliers.
- Physical Gold for Commerce and Finance:
The London Bullion Market Association (LBMA) is a market where gold is physically traded over-the-counter. The LBMA recorded 6,573 transfers of gold amounting to 29.2 million oz ($46.4 billion)—all in March 2020. This was the largest amount of monthly transfers since 1996.
- Coins and Small Bars:
One ounce American Gold Eagle coins serve as a good proxy for the demand for physical gold from retail investors. The COINGEAG Index, which tracks the premium price of 1 oz. Gold Eagles, spiked during the early stages of the lockdown.
Each one of these markets requires access to physical gold. COVID-19 restrictions have disrupted shipping and delivery options, making it harder to access gold. The market for gold has been functioning nonetheless.
So how does gold get to customers during a time of crisis?
Gold’s Journey: From the Ground to the Vault
Gold ore goes through several stages before being ready for the market.
Gold must be released from other minerals to produce a doré bar—a semi-pure alloy of gold that needs further purification to meet investment standards. Doré bars are typically produced at mine sites and transported to refiners.
Refineries are responsible for turning semi-pure gold alloys into refined, pure, gold. In addition to reprocessing doré bars from mines, refiners also recycle gold from scrap materials. Although gold mining is geographically diverse and occurs in all continents except Antarctica, there are only a handful of gold refineries around the world.
Once it’s refined, gold is transported to financial hubs around the world. There are three main ways gold travels the world, each with their own costs and benefits:
- Commercial Flights:
Cheapest of the three options, commercial flights are useful in transporting gold over established passenger routes. However, the volume of gold carried by a commercial flight is typically small and subject to spacing priorities.
- Cargo Planes:
At a relatively moderate cost, cargo planes carry medium to large amounts of gold along established trade routes. The space dedicated to cargo determines the cost, with higher volumes leading to higher shipping prices.
- Chartered Airlines:
Chartered airlines offer a wider range of travel routes with dedicated shipping space and services tailored to customer demand. However, they charge a high price for these conveniences.
- Commercial Flights:
After reaching its destination via air, armored trucks with security personnel move the gold to vaults and customers in financial hubs around the world.
The World’s Biggest Gold Hubs
The U.K.’s bullion banks hold the world’s biggest commercial stockpiles of gold, equal to 10 months of global gold mine output. London is the largest gold hub, with numerous vaults dedicated to gold and other precious metals.
Four of the largest gold refineries in the world are located in Switzerland, making it an important part of the gold supply chain. Hong Kong, Singapore, and Dubai are surprising additions and remain significant traders of gold despite having no mines within their borders.
COVID-19: The Perfect Storm for Gold?
As countries took stringent safety measures such as travel restrictions and border closures, the number of commercial flights dropped exponentially across the world. For the few commercial airlines that still operated, gold was a low-priority cargo as space was dedicated to medical supplies.
This impeded the flow of gold through the supply chain, increasing the cost of delivery and the price of gold. However, thanks to the diverse geography of gold mining, some countries did not halt production—this helped avoid a complete stall in the supply of gold.
The COVID-19 pandemic has created the perfect storm for gold by disrupting the global supply chain while investor demand for gold exploded. Despite heightened delivery risks and disruptions, the gold market has managed to continue operating thus far.
Golden Bulls: Visualizing the Price of Gold from 1915-2020
We break down gold’s three major bull markets over the last century. This includes the current one, in which gold has hit 8-year highs.
Golden Bulls: Visualizing the Price of Gold from 1915-2020
Some people view gold as a relic, a thing of kings, pirates, and myth. It does not produce income, sits in vaults, and adorns the necks and wrists of the wealthy.
But this too is just myth.
In fact, as a financial asset, gold’s value has shone over time with periods of exceptional performance, one of which may be occurring now.
Today’s infographic comes to us from Sprott Physical Gold Trust and outlines the history of the price of gold from 1915 to 2020 and three bull markets or “Golden bulls” since 1969, using monthly data from the London Bullion Market Association.
But first a little history…
The Gold Standard
*All figures are in USD
During the early days of the American Republic, the U.S. used the British gold standard to set the price of its currency. In 1791, it established the price of gold at $19.75 per ounce but also allowed redemption in silver. In 1834, it raised the price of gold to $20.67 per ounce. The price of gold would retain a nominal value through depressions, civil wars, and wars.
However, $20 today is not the same as $20 in the past. The U.S. dollar may have been convertible at a set price, but the amount of goods that it could buy varies year to year based on inflation. So for example from 1934 to 1938, one ounce of gold would cost $34, but $34 today would purchase a small fraction of an ounce of gold.
While the price of gold may appear cheap in the past, adjusted for inflation it is not as low as you would think. Governments would set the price of its currency against an asset to ensure the stability of prices, however if there would be too many claims against the underlying asset, that asset would run out and the currency would become worthless.
This threat would force the hands of governments to change the standards, as currency became more common and gold reserves more scarce.
An Era of Government Intervention
In the wake of the 1929 stock market crash, investors started redeeming U.S. dollars for its equivalent value in gold, removing currency from the economy. In order to stem the flow of funds into gold and the depletion of government gold reserves, in 1933, President Franklin D. Roosevelt limited the private ownership of gold to discourage hoarding and encourage investing. In 1934, Congress passed the Gold Reserve Act which prohibited the private ownership of gold and nominally raised the price of gold to $35 per ounce.
In 1944, the victorious Allied powers negotiated the Bretton Woods Agreement, making the U.S. dollar the official global reserve currency. The United States ensured an ounce of gold would be worth $35 in its currency—at least until the onset of a stagnant economy in the early Seventies led to the official end of any real gold standard.
Golden Bull #1: December 1969 – January 1980
In 1969, the U.S. gold standard had risen to $42 per ounce in nominal terms, however a period of economic volatility would challenge and change U.S. monetary policy.
On August 15, 1971, President Richard Nixon mandated the Federal Reserve to stop honoring the U.S. dollar’s value in gold at a fixed value, abandoning the gold standard. In 1974, President Gerald Ford would once again allow the private ownership of gold bullion. Energy crises, soaring inflation, and high unemployment stagnated the economy.
By January 1980, the price of gold reached $2,234 per ounce in today’s dollars amidst an environment of double-digit inflation. Federal Reserve chairman Paul Volcker fought this inflation with double-digit interest rates which in turn slowed the economy, causing a recession.
The interest-rate-induced recession would herald in a new global economic boom that defined the Eighties and Nineties. The price of gold dropped to $753.96 per ounce by June 1985, as the economy improved.
From December 1969 to January 1980, gold rose from $285 to $2,234 per ounce, an increase of 684% over 122 months, in inflation-adjusted terms.
Golden Bull #2: August 1999 – August 2011
Expanding household incomes and ever declining interest rates under Federal Reserve chairman Greenspan pushed gold further down to a low of $377.44 per ounce by the end of April 2001.
Loose monetary policy and a reduced tax on capital gains spurred speculative investments into the new internet economy through a growing retail brokerage market and the emergence of venture capital. The tech bubble would eventually pop as these companies were unable to build sustainable businesses and investor money dried up.
Over the year of 2000, investors rushed to exit their speculative tech investments resulting in several market crashes. Then in September 2001, 9/11 happened, marking the beginning of a new era. Gold steadily rose during this period.
In 2008, the Global Financial Crisis shook financial markets and left a recession. Policy makers and central bankers embarked on a controversial policy of quantitative easing to support financial markets. The price of one ounce of gold reached new highs by the end of August 2011, as worries on debt levels mounted for the U.S. and other countries.
From August 1999 to August 2011, gold rose from $394 to $2,066 per ounce, an increase of 425% over 145 months, in inflation-adjusted terms.
Golden Bull #3?: November 2015 – May 2020
In the aftermath of the GFC, the Federal Reserve stoked an economic recovery with cheap money, seeing gold track to a low of $1,050 per ounce by December 2015. It was not until the election of a peculiar American president in 2016 that gold would rise again.
Pressure to increase interest rates, an aging debt-fueled economic recovery, a trade war with China, and the recent COVID-19 crisis has once again provoked economic uncertainty and a renewed interest in gold. With interest rates already at historic lows and quantitative easing as standard operating procedure, global economies are entering unprecedented territory.
There is still little insight into the direction of the economy but since November 2015 to May 2020, the price of gold has risen from $1,146 to $1,726 per ounce, 55% over 55 months.
Gold Going Forward
In an era of tech startups, ETFs, and algorithmic trading, many people consider gold to be a shiny paperweight—however, its performance over time against other assets shows it is far from this.
In 1915, an ounce of gold was worth $488.66 per ounce in today’s dollars and as of May 15, 2020, $1,751 per ounce. Gold has proven its value over time as companies, countries, and governments come and go.
“Golden Bulls” are no periods for idle idol worship. Gold will always be gold, in myth and in fact.
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