“We have gold because we cannot trust governments.” President Herbert Hoover’s statement in 1933 to Franklin D. Roosevelt foresaw one of the most draconian events in U.S. financial history: the Emergency Banking Act occurred that same year, forcing all Americans to convert their gold coins, bullion and certificates into U.S. dollars. While the Act successfully stopped the outflow of gold during the Great Depression, it did not change the conviction of gold bugs, those who are forever confident in gold’s stability as a source of wealth.
Before investing in gold, you must understand its history – a history that, like that of no asset class, has a unique influence on its own demand and supply today. Gold bugs still cling to a past when gold was king. But gold’s past includes also a fall, which must be understood to properly assess its future.
A Love Affair That Has Lasted 5,000 Years
For 5,000 years, gold’s combination of luster, malleability, density and scarcity has captivated humankind like no other metal. According to Peter Bernstein’s book “The Power of Gold: The History of Obsession”, gold is so dense that one ton of it can be packed into a cubic foot.
At the start of this obsession, gold was used solely for worship. A trip to any of the world’s ancient sacred sites demonstrates this. Today, gold’s most popular use in the manufacture of jewelry.
Around 700 B.C., gold was made into coins for the first time, enhancing its usability as a monetary unit: before this, gold, in its use as money, had to be weighed and checked for purity when settling trades.
Gold coins, however, were not a perfect solution since a common practice for centuries to come was to clip these slightly irregular coins to accumulate enough gold that could be melted down into bullion. But in 1696, the Great Recoinage in England introduced a technology that automated the production of coins, and put an end to clipping.
The discovery of America in the 15th century brought the first great gold rush. Spain’s plunder of treasures from the New World raised Europe’s supply of gold five-fold in the 16th century. Subsequent gold rushes in the Americas, Australia and South Africa took place in the 19th century.
Europe’s introduction of paper money occurred in the 16th century, with the use of debt instruments issued by private parties. While gold coins and bullion continued to dominate the monetary system of Europe, it was not until the 18th century that paper money began to dominate. The struggle between paper money and gold would eventually result in the introduction of a gold standard.
source : http://www.investopedia.com/articles/05/030705.asp