Gold Heading to $10,000 - Jim Rickards, page-158

Gold is not normally used as a local currency, though you might find point 41 of the Perth Mints fun facts interesting:

"41. All Perth Mint bullion coins are issued as legal tender under the Australian Currency Act 1965."

Of course the average Australian does not use gold coins as their day to day currency.

That said, gold is more commonly used as as a medium of exchanges BETWEEN countries, rather than WITHIN countries. That's why central banks keep it as a foriegn reserve.

If a country deplete their foreign currency reserves, you usually end up with a currency crisis (aka a balance of payments crisis), I'll let wikipedia explain:

"A currency crisis is when serious doubt exists as to whether a country's central bank has sufficient foreign exchange reserves to maintain the country's fixed exchange rate. The crisis is often accompanied by a speculative attack in the foreign exchange market. A currency crisis results from chronic balance of payments deficits, and thus is also called a balance of payments crisis. Often such a crisis culminates in a devaluation of the currency."

So when you really get down to it, the value of a country's currency is basically a derivative of the productivity of the local economy which its foreign reserves is representative of (and of which gold usually make up a decent proportion of).

So the reason why the world accepts AUDs as payment for their goods and services is because they believe that we also sell goods and services of value to the world to the point that they believe they will be able to exchange those AUDs for something tangible in the future.

That said, if your balance of payment deteriorates (ie negative changes in regards to export/imports/capital flows) then its the foreign reserves that will be used to prevent a currency from collapsing, and the BEST reserve to own in this situation is gold (that's why all the central banks keep so much of it).

And that is why in the long run it's bad for any economy to expand its money supply via commercial bank lending or government borrowing to invest in non-productive investments (ie things that don't make the economy more competitive to export goods (or reduce imports) relative to the world) because in the long run that's where a currency gains its strength, and that's how a nation's wealth is determined.

On top of that keeping other country's currency as a part of your foreign reserves comes with the risk that they may not manage their own economies well and their currency may be debased over time which then undermines your own country's reserves (which is why most major countries were converting their USD reserves into gold in the late 60s and early 70s, because they saw the US expanding its monetary base and M3 money supply aggressively over the years and they knew the long term implications of that;  inflation/debasement).

So skol you can argue that gold isn't a "day to day local currency" and you'd be right, but it is most certainly a global currency, so much so that gold constituted 17.1 percent of the reserves of advanced economies at the end of 2013, which makes the USD and Euro the only two other currencies more trusted as a form of foreign reserve...

...and given central banks increasing purchases of gold and the gold price appreciation I suspect the faith in even these two currencies is waning relative to gold as the effects of QE and zero interest rates play out.

I don't plan to go down to the shops to buy bread with gold anytime soon, but I'm pretty sure that in a world of over indebtedness and competitive devaluations it will force more central banks and governments to hold more gold in reserves rather than take the counter-party risk of holding USD, EUR and SDRs...

That's what will force the price of gold up over time.