In gold we trust

One of my neighbours is writing a book about Somalia. It is to be called The Most Dangerous Place on Earth, something this sadly war-torn country has been for some time. But while Somalia is a couple of decades into a period during which it has had no central government to speak of, it isn't quite the failed state you think it is.

In March, The Economist noted that its currency the Somali shilling is still in use, which it is. But not only is it still current (despite not being backed by anything), but it has also mostly held its value: failed states usually end up hyper-inflating their currency into oblivion and one way or another using the US dollar instead.

Not so Somalia large transactions are generally "dollarised", says The Economist, but smaller transactions happen in relatively stable shillings. A report in 2006 suggested that, in an enjoyable contradiction of all economic theory, around 80% of financial exchanges in Somalia took place in shillings.

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How has this worked? Simple, really. Firstly, it is down to the fact that, thanks to the absence of a real central bank (it technically re-opened in 2010), no shillings have been printed since 1992. Limit the supply of money and you don't get very high inflation (inflation being all about the supply of money).

But it is also about trust something so many central-bank-backed currencies no longer command. The Economist explains: "Since each party to a transaction is likely to be able to place the other within Somalia's system of kinship, the shilling is underpinned by a strong social glue... an individual who flouts the system risks jeopardising trust in both himself and his clan."

I had this in mind when I saw an article earlier in the week about another currency that is officially backed by no central bank and the value of which is based on short supply and trust gold. According to The Times, gold coins minted to mark the London Olympics are not only selling like hotcakes but are changing hands at 40%-50% mark-ups in China with dealers claiming that "people have been ordering friends, family or anyone they know visiting to make sure they come back with a coin".

This all makes sense. The property market is in trouble, the stockmarket is neither a real private market nor is it rising, and deposit rates are well below inflation it is therefore perfectly rational for Chinese people with spare cash to be looking for another way to store wealth. Gold works for this and gold coins work particularly well.

Why coins? Because they are so easy to transport: capital flight from China might not be strictly legal, but it seems to be rising fast. And what better way to shift your money around the place than when it's contained in a nice-looking souvenir? The coins, says The Times, are "unostentatious, explicable as collectors' items and convertible into hard cash". All good reasons to hold them.