For thousands of years, gold fascinated humanity. No other precious metal possesses so much power as gold does.
But what makes a precious metal? From all the symbols in the Mendeleev table, only a few fit into this category: gold, silver, palladium, platinum, and rhodium. However, the last three were discovered much late than gold, and have characteristics that force people to use only advanced technologies to get the best out of them. Yet, gold is an obsession for over six thousand years. Its power comes from the wonderful attributes it has. Firstly, it keeps its quality in time. And secondly, it comes in limited quantities.
All the gold ever mined in the world doesn’t exceed two hundred thousand ounces. And, new deposits are more and more difficult to find and exploit. In fact, it is said that the timespan between finding a gold deposit and setting up its exploitation is anywhere from ten to twenty years. The current annual gold production is so small that major world powers struggle to grasp as much gold as possible to consolidate position.
Gold’s Mystery
Because gold keeps its quality in time (it’s a non-corrosive metal, for example), it means that, in one form or another, it all exists somewhere in the world. Either in the form of gold bars or jewelry, in the vault of a central bank or hidden in Switzerland bunkers, gold offered a great investment of time. To this day, it is fascinating traders, from short-term to long-term oriented ones. How come?
Its secret comes from the store of value qualities. Gold offers a chance to diversify any portfolio and protect against all kind of economic troubles. No matter what, gold keeps its value. I mean, it kept it for thousands of years, so chances are it will do so in the years to come too.
To this day, it is difficult to know exactly who owns how much gold. Some countries reveal their gold holdings, but some don’t. If one sums up all the declared gold reserves and the estimated gold stored in jewelry, the result doesn’t fit with the entire quantity we know exists on the market.
Is Gold Money?
This question is so actual these days with cryptocurrencies on everybody’s lips that the similarities are astounding. Indeed, is gold money? Or, is bitcoin money?
To answer such question, the starting point should be the very definition of money. What is money, after all? In time, money took various shapes. Trade is the reason for money: we need something from someone else, and we pay with money. But the other party must accept the money we pay with. Nowadays, money represents a bill backed by a central bank’s credibility. However, it wasn’t always like this. Before bills, coins were money. And, before coins, people were engaged in all kind of barter deals. While the concept of money changed in time (barter, coins, bills, crypto, etc.), gold didn’t. It is the universally accepted store of value and will likely remain so.
Gold and Monetary Policy
Central banks are all too familiar with gold and its qualities. Why else they look for gold as a source of gaining influence for their country? Because gold is so scarce, central banks tried to get as much of it as possible. Today, major central banks in the world and the IMF (International Monetary Fund) own only a little over ten percent of world’s gold. Where’s the rest?
Back in time, gold-backed currencies. The Bretton Woods system pegged the U.S. Dollar to gold on a $35/ounce. Tellingly, the dollar was as good as gold. But it turned out the central bank, or the Fed, couldn’t engage in sophisticated monetary policy actions due to the lack of gold. I mean, you cannot print gold, right? So, the Fed was trapped, and Nixon came to help. In 1971, in a decision known as the Nixon shock, the United States dropped the peg on gold. From that moment on, other countries did the same. Today, no nation has the gold standard in place anymore. Yet, gold didn’t lose its value.
Owning Gold
As a trader, there are multiple ways to own gold. One is just to buy gold from various sources and store it in a safe place. Typically, the safe place is associated with a safe country. People choose Switzerland or Singapore most of the times due to their government’s stability.
But where to buy gold from? That’s easy, just open an Internet browser, and plenty of regulated firms will do that for you. Another way is to buy paper gold. Paper gold or ETF (Exchange Traded Fund) is just a derivative. Is it riskier than owning physical gold? Yes. Does it share the same qualities? No. Then why people buy it? That’s simple: to speculate on its price.
Buying and owning physical gold bear some costs. Both for the transaction and for storing it. Hence, when people buy physical gold, typically they do it with the intention of keeping it for a long time, as a hedge against inflation, for example.
But the price of gold is denominated in U.S. dollars, which makes it subject to speculation. As such, ETF’s appeared. Or, paper gold. With such a product, traders have instant access to the gold market. All they must do is to open an online trading account and start trading the ETF, providing the broker offers it. GDP is the most popular choice.
Yet another way to own gold is to go for the mining industry. I mean, why not owning shares in a mining company, rather than owning the physical stuff or an ETF? Such a decision is not easy to make. Nor, safe. The problem comes from the fact that there are many gold miners out there. Which one to own and how much? Investing in shares also requires a more significant time horizon than trading ETFs. Traders buy and sell GLD multiple times during the trading day to profit from its liquidity.
We can’t say the same for stocks. A buy and hold strategy works most of the times in stock trading so that it might be the preferred choice here too. The risk comes from exposure to a single company. And, because the mining process (the time span from the moment gold is identified until the or gets exploited) is so lengthy and costly, few companies have the power to do it. On top of it, gold price fluctuations affect the profitability of a company. Not once, the price of gold jumped or tanked fifty percent in one year. A negative move is enough to stop any investment process and affects the bottom line in a company’s profitability.
Traders avoid exposure on one mining company via ETFs trading. Some ETF’s follow entire industries or economic sectors, and the same goes for the gold industry. However, trading such an ETF bears more risks than the shares of a single company because of the unique conditions in each Exchange Traded Fund. For example, some trade at five times multiples, meaning for every one point move in the actual index, the amount moved in the trading account is five times bigger.
Gold appears on the Forex dashboard as XAUUSD and depends mostly on the way the U.S. dollar moves. What matters here is to understand that the XAUUSD pair is mainly used as a speculation vehicle, rather than a long-term investment.
Gold in Bad Economic Times
As already mentioned, gold is a store of value. More precisely, it keeps value when things go wrong in an economy. Because all governments have a fiat currency now, not backed by gold, the temptation to “play” with the value of money is big. When the government needs some more money, the printing presses are there to solve the problem. Yet, there’s not a solution from an economic point of view. In fact, it leads to rampant inflation.
Of course, developed economies and capitalistic countries didn’t experience significant inflationary levels in the last years. But unfortunately, plenty of examples surround us. Look at what happens in Venezuela. Hyper-inflation eats from people’s savings, and the logical step is to invest in physical assets.
Real estate is a solution. Precious metals, another, with gold on top of it. But there’s another way to look at investing in gold than protection against governments debasing their currencies. The thing is that gold, even when it loses value, it loses less than the other financial vehicles. History is full of the period of times when the stock market lost some thirty percent or more, while gold only lost a few percentages. While it did lose value, it handled the pressure quite well.
Supply and Demand
While gold is viewed as a commodity, there’s a big difference between gold and, say oil. For example, if OPEC (Organization of Petroleum Exporting Countries) decides to change the production levels, the price of oil adapts in an instant. Whit gold the situation differs. Because of the relatively limited supply and production levels, the quantity of newly mined gold hardly matters in the amount of gold that already exists on the market. In other words, a supply disruption barely moves gold prices. In fact, most of the times the market entirely ignores it.
As for demand, multiple factors weigh in. One would be demand from countries that value gold as a store of value. Curious enough, these are countries that experienced less economic stability. For this reason, traders talk about the West and East attitude towards gold. West, of course, refers to the United States, where the currency didn’t lose value in modern times. Hence, the population doesn’t feel the need to protect their assets by investing in gold. On the other hand, the Eastern part of the world suffered from heightened inflationary levels. Not once, governments plundered people’s economies, and families lost fortunes virtually overnight.
Hence, the feeling remained through generations, and how best to keep your things safe than owning some gold? It is no wonder gold plays a crucial role in Middle East civilization and India, for example. Supply and demand from these parts of the world influence the price of gold.
Is the Price of Gold Suppressed?
Not once, conspiration theories pointed to the price of gold as being manipulated. Governments, on the desire to acquire more and more gold, keep the price suppressed so that they buy at lower prices. Nothing has been proved so far. However, one cannot stop wondering why humanity would go such lengths to own this curious yellow metal? Why countries like China won’t disclose the gold it owns, or why even some European banks refuse to disclose the amount in their vaults?
Because of its weight, gold is difficult to maneuver. Or, to move from one part to another. For this reason, when central banks sell the gold it has in vaults, the selling takes place only on paper. The gold never leaves the vaults. Instead, just the new owner’s name differs.
In times of war, many countries shipped their gold to other parts of the world. The United States was the destination, with the United Kingdom and continental Europe being ravaged by war’s devastation. As such, many governments decided to ship the gold, or the countries wealth, in other central banks’ custody, to avoid the plundering of it. France, United Kingdom, and even Germany did this. They protected their gold by shipping it away to foreign countries.
Conclusion
Gold remains one of the most sophisticated investment vehicles. It stores value, and it offers stability in turbulent times. For whatever the reasons, governments still go the extra mile to own gold. Recently, Germany repatriated its gold from the United States in what is known to be one of the most expansive missions in the last years. Yet, it didn’t matter as the gold now sits in Bundesbank’s vaults.
To some up, gold offers an alternative to fiat money. As the only form of payment that stood the test of time, gold remains the one precious metals everyone wants to own.
