A Brief Introduction to Gold
Reading time: 5 minutes
Gold has always been respected throughout the world for its value and rich history. Compared to paper currency, coins, or other types of assets, gold has preserved its value throughout the years, and people use it as way to pass their wealth from one generation to the next.
A Short History of Gold
The year 1792 is marked as one of the most paramount moves for gold and silver-backed currency, as the U.S. put the dollar on the gold and silver standard. A little under two centuries later, in 1971, President Richard Nixon removed the U.S from the gold standard, an economic shift that dramatically impacted the price of gold around the world. On 21 January 1980, gold prices skyrocketed from $35/ounce, to a whopping $850/ounce (or $2,398.21 adjusted for inflation). On 19 March 2008, gold hit a high of $1,022.40 per ounce.
Gold Price and Influencing Factors
Of all the precious metals, gold is the most popular as an investment, and it is generally bought as a method of risk diversification, especially through the use of futures contracts and derivatives. Just as other markets, the gold market is subject to volatility. Gold price is influenced by supply and demand, but unlike most commodities, saving and disposal impacts its price more than its consumption does. The world-renowned investor, Warren Buffett, has claimed that the entire amount of gold found above-ground could fit into a cube with sides of just 20 metres. Nevertheless, the amount of gold that exists today differs, and researchers have suggested that the cube could be smaller or larger.
Taking into account the enormous quantity of gold stored above-ground, compared to the annual production, the price of gold mostly depends on changes in sentiment (demand), rather than changes in annual production (supply). Based on data from the World Gold Council, for the past few years, the annual mine production of gold has been approximately 2,500 tonnes. From this amount, 2,000 tonnes are used in jewellery or industrial/dental production, while the rest goes to retail investors and exchange traded gold funds.
Some of the factors that influence the price of gold are:
The price of gold is closely related to interest rates: as interest rates rise, the gold price (which earns no interest), has a tendency to fall, and vice-versa. This is why the gold price can be correlated to central banks via the monetary policy decisions made by them, which are related to interest rates.
Hedge Against Financial Stress
Just as all other precious metals, gold may be used as a hedge against inflation, deflation, or currency devaluation.
Jewellery and Industrial Demand
Jewellery continues to account for over two-thirds of the annual gold demand, whereby India is the largest consumer in terms of volume, followed by China, and the US. The industrial, dental, and medical uses account for around 12% of the gold demand, as gold has high thermal and electrical conductivity properties.
Gold Jewellery Recycling
Recycling second-hand jewellery has become a multi-million dollar industry in recent years. People can earn money by selling their old or broken jewellery to local or online gold buyers.
War, Invasion and National Emergency
When dollars were convertible into gold via the gold standard, both were considered as money, but the majority preferred to carry paper banknotes. A bank run might be the result of people fearing their bank would fail. This is what happened in the US during the Great Depression of the 1930s, which led President Roosevelt to impose a national emergency, and issue Executive Order 6102, outlawing the "hoarding" of gold by US citizens.
It is certain that gold will be in demand for a long time, due to its historical significance and electrical conductivity. Compared to other commodities, gold has undergone some of the most extreme price fluctuations. Though it's questionable whether it will continue to be a viable inflationary hedge; however, the fact that it is a rare and beautiful precious metal will always keep it in the news.
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.