The term “forty-niners” refers to migrants who headed to California during the peak year of the California gold rush – 1849. A reported 300,000 prospectors came from all over America and indeed the world to cash in on the shiny metal. Local banks and gold dealers began to issue banknotes in exchange for gold. 
The gold was then later sent by California’s banks to US national banks in exchange for national paper currency. The influx of gold into the money supply was invigorating for the American economy and exemplifies perfectly the benefits that are associated with a monetary system that is backed by gold. It is 'economics 101' where the balance of supply and demand dictates value.
A gold standard-backed currency is one that agrees to convert paper money into a fixed amount of gold. Therefore, those 300,000 opportunistic gold miners were not only creating wealth for themselves but for the whole American economy.
A monetary system backed by gold enjoys the benefits associated with a stable and natural rate of growth in money supply. A steady rate of growth keeps price rises stable, and all other factors being equal, keeps the economy stable. This works on a simple supply and demand basis. An overvalued gold price incentivises miners to increase production which in turn depresses the value. The same is true vice versa if gold is undervalued and miners have lesser incentive to produce, and supply goes down. When we see cause and effect so inextricably linked, it is easy to understand our fiscal (monetary?) system.
A fiat system, on the other hand, where legal tender is created merely through its own printing, does not enjoy such a simple process. Fiat currency is not supported by any physical commodity and relies only on the shared belief that it holds a certain value. It is reliant on the economy and government of the day to dictate its value. The more confidence a public has in the government and economy, the more successfully a fiat currency will function. With the invention of electronic banking, a government need not even print the money, simply inputting numbers into a keyboard creates cash.
When, in 1971 the US decided to abandon the gold standard, the predictable happened. From 1980 to 2012, credit as a percentage of GDP rose from 162 per cent to 353 per cent. The system that had maintained credit at around 150 per cent was abandoned for one that encouraged a party paid for on a tab that – in theory – could never run out.
It should not be considered dramatic to think that the only way the US and other western governments can get out of this debt hole is by inflating its way out. A dramatic rise in interest rates coupled with a substantial dollar depreciation is one way this can be achieved. A much more severe scenario occurs if we completely lose confidence in our banking systems, and, assuming private ownership of it is not outlawed, gold rises to over $10,000 per ounce.
It is in times like these that as an investor, gold presents an opportunity. Not an opportunity to invest I hasten to add, but an opportunity to hedge against the inevitable debasing of currency which comes as a natural symptom in a recession. As well as, it should be noted, when central banks allow inflation to be higher than interest rates.
As for its current price? The value of gold is notoriously hard to work out, however my preferred method is to consider the long-term trend of the price in real terms and set against it the current price. This allows you to see where gold is likely to go, and whether the current price is higher or lower than that. On this basis the gold price probably sits at around 10 per cent below real price trend over the last 60 years or so. Whilst this is nowhere near where the price dropped to in the late 1990s and late 1960s, it is the lowest it has been for 15 years or so.
Peter Elston is chief investment officer at Seneca Investment Managers. The views expressed above are his own and should not be taken as investment advice.