Sunday, January 13, 2013

The Economic Role of Gold: A Brief Essay on How Gold Has Shaped Our Economy



"The Economic Role of Gold: A Brief Essay on How Gold Has Shaped Our Economy"," Gold when discovered nearly 40,000 years ago when Paleolithic man picked up a piece of rock which had gold deposits in it.
 Being malleable, soft it did not have much use with early man.
 A bright yellow illuminating object that may have caught the attention of early man was often traded as a valuable piece of object much later on as the system of barter did not have a place for gold nor was it used.
 But it was only recently about 5000 years ago when the social status was devised and man divided the society into classes that he understood that this is a rare metal and thus precious and started using it in more aesthetic manners including jewelry, for worship and for trade.
 Gold has always been considered to be incorruptible without blemish.
 The Aztecs and the Incas believed that gold came from the sun, considering it to be its sweat and excretion.
 Thus gold had a significant impact upon all these ancient empires and their cultures.
 Their power and influence across the Nile grew with the discovery of the Nubian gold mines.
 The Egyptians had established a system of economics and the first monetary exchange based on gold and silver and thus creating an economic order based out of currency and not barter.
 When there was no money, people still traded using whatever they could lay their hands on.
 This gave rise to a system of trade that we call as barter.
 Generally the chief item of trade among the people of Asia and Europe was cattle.
 This resulted in the specializations of trade and men started living in societies where each man had a role to play in the larger scheme of things.
 A common form of sustenance thus resulted in what we call as society.
 Precious metals came after cattle and started to be used as a supplementary form of exchange and then slowly took over as the primary form.
 1 bag of rice for 2 new clothes, 20 bags of rice for a cow and so on.
 When the market expanded, things became complicated and more and items were started to be traded.
 This gave birth to money.


Rise of gold as an international standard, why it was popular?

Gold has always been accepted universally.
 The significance of gold as an international standard of payment rose when it was accepted internationally as a form of payment.
 However the International Monetary Fund took gold out of the equation and ensured that it no more plays a significant role.


During the years 1880 to 1914 gold formed the basis of payment internationally.
 The governments would have to repay the amount of the printed currency in gold when presented.
 The basic idea was to restore the confidence of the people on the circulated paper currency and ensure the survival of it.
 However the scenario again changed after the first Great War.
 High inflation and taxation had the entire Europe and America reeling.
 This was followed by several European nations who also returned back to the gold standard.
 The pressures of having run the war for years, the economies started to find the pinch and slowly started to detach themselves from the gold standard.
 It practically gave a monopolistic control over possession of gold in the country to the government of United States.
 The price of gold was sent to $35 an ounce and the dollar was devalued as well.


During the 1944 when most of the world was battling the Second World War, representatives of 44 allied nations met at Bretton Woods, New Hampshire, for a conference held between July 1 and July 22.
 This led to the establishment of the International Monetary Fund and the International Bank for Reconstruction and Development.
 At that time most of the European nations were in huge debt and they started transferring their gold to the United States.
 Thus in the later years the US dollar become the dominating currency.


However major countries like France and England started selling of their US Dollar reserves and traded them for gold from the US treasury.
 Added to this was the considerable strain put on the US economy during the ongoing Vietnam war which lead to the then President Nixon to stop the full convertibility of the US dollar to gold.


With the collapse of the Bretton Woods systems in USA in 1973 ordinary citizens were no longer under the ban to purchase bullion and or invest in it.
 Similar bans were also in existence in UK and Japan which also came off in the years 1979 and 1973 respectively.
 Countries like Turkey, where gold import was previously banned, saw its domestic, gold prices jump 85% following the lifting of the ban on imports.
 The reason is that gold is tied to the currency and as such until the whole stock of gold was increased additional money could not be printed.
 Since the money was tied with the gold, the US government had to look for other opportunities and tried to attract the foreign investors who would bring in their investment in the form of gold.


Another important advantage of the gold standard is that excessive printing of cheap money can be prevented another anti inflationary method.


All currencies of the world has been at one time of the other been formed from the base gold and silver metals.
 They were of great intrinsic value unlike the paper currency and can be exchanged easily for commodities and are widely accepted.
 Paper currency when it first started off was attached to this base gold currency.
 The fact that they were later detached from gold and silver, made them lose their confidence in paper currency.
 If the price of eggs increases to $5 a dozen on Thursday you will probably wonder whether you are dealing at the right price.


Why gold has been a popular method of savings

In the 1920's if you wanted to buy a new pair of trousers you needed probably $10.
 In 2011 if you want to buy a trouser, that same $10 gold coin will buy you the pair of trousers but the $10 printed note will be useless.
 To a large extent the prices of gold and for that matter even silver has not seen a downward spiral even during the greatest of depressions.
 During the Gold Decree the price of gild was fixed at 35 dollars to an ounce.
 In both these cases the price was set by the government of US and not due to market dynamics.
 The two largest gold producing mines in USA and Canada managed to do this which speaks volumes about the persistence and strength of gold in any market situation.
 It is like saving their money securely which is not going to devalue over time and waiting till the investment weather is good for further diversification of the portfolio.
 An investment expert will never ask you to put all your money in a single stock or investment option because of the inherent risks that it brings to the portfolio.
 Gold being a hard currency gives more intrinsic value to your portfolios and credibility to it.
 It is more of the safety and stability of the investment which encourages buying gold.
to hold their prices and remain steady even though there is a considerable price deflation all around means that when you invest in gold your investment though not necessarily going to provide an immediate return, will provide a considerable gain of wealth when your compare the prices after some time.
 The Dow Jones Industrial Average has always been competitive with the price of gold.
 This can be further explained using a small example.
 If you wish to purchase a car, only about 10 ounce will buy you a luxurious sedan.
 This is because of the price of gold which has gone up significantly compared to the other products in the market.
 Physically buying gold and storing them a location that is under your control is not advisable because of the inherent risks of it.
 When investing precious metals, the cost of storage is also to be taken into consideration.
 An estimated storage costs for holding gold is 0.
 The costs also include the insurance coverage against theft for the investment.
 A soft currency investment option is never a hard currency and lacks the intrinsic value that hard currency like gold, silver, palladium or platinum has.
 Gold on the other hand is a reserve currency which is accepted under any market situation and as such a better option.
 hyperinflation

Gold is one commodity that has always been looked with confidence by the investors.
 As such if paper money becomes obsolete tomorrow and the only mode of accepted payment becomes gold or silver, then we the people who does not possess gold but only electronic balances of money, will have no where to go.
 So basically all our huge savings, investments and bonds will have vanished.
 One of my colleagues had once said me, ""gold at $1000 a once, this is not a price one should invest into something.
 Paper money in itself does not worth anything; gold does.


Irrespective of that, gold prices have also suffered a price deviation.
 Even the price of the yellow metal, which was otherwise so popular, also went down.
 This resulted in gold prices falling by about 30 percent in November of 2008 from the March 2008 price of $1000 per ounce.
 Due to inherent rules of a demand and supply of any commodity in the market which drives the price of it, gold prices can severely depreciate if there is a significant rise of the supply of gold in the market.
 It is unlikely something of that sort happening in the near future.
 The internet is abuzz with speculations and predictions.
 Other market experts have even predicted a $10,000 value of the yellow metal.


Again some schools of opinion say that anything that is being traded and is consistently rising in price has the tendency to correct itself out at one point of time.
 Evidently the shares being traded are only limited in numbers and the company's cannot keep adding more and more shares as they are being traded.
 However nothing can simply go on increasing indefinitely and as such price will stall at one point of time.
 As soon as prices start to fall, people who have invested their life's savings will want to cash out and escape the tumbling share market.
 Prices will tumble and values will get eroded overnight.
 Recession will follow simply because there will be less money in circulation.


Hyperinflation has its own effects on the economy.
 One way to explain a situation like this is by giving an example.
 Consumers need the goods but they are unable to buy it because of the minimal amount in supply.


In the modern world, governments of the world has the power to print money as they wish and that has been possible because of the absence of a pegged exchange rate to an object of intrinsic value.
 One would imagine that this would come from taxes but in an economy which is already reeling with absence of jobs and there is no real inkling of hope that jobs are getting back in drones, increased taxes will only add to the misery.
 Indirectly they are also fuelling the inflationary forces.
 Some speculators are expecting gold prices to touch $5000 an ounce and every body seems to be coming out with a speculation of their own and the internet is abuzz these days.
 Why would the gold price be a mania, you ask? Gold is in a relatively fixed amount of production.
 However contrary to the supply demand is ever increasing.
 Even if all Fiat currencies fails to become confetti and the banks fail around the globe the real possession value of gold is not going to fail and it will continue to be accepted.
 However the supply of gold is not going to increase to the demand of the consumers and thus the prices will continue to be pushed beyond the limits of a common man.
 If it starts to go down as the market starts to correct itself, we can see a recession setting in or at least a bear market.
 As per a report from the Bureau of Labor Statistics non farm payrolls have increased by 216,000 which is higher than the consensus expectation of 185,000.


Investment in Gold via Dollar Cost Averaging

Since the intrinsic value of gold is never challenged and the fact remains that it is a true reserve currency to the world, an investment in gold at any point (unless it is going over the roof and is due to correct itself imminently) is a safe method to store your net values.
 You invest a fixed amount of money periodically over a fixed period of time.
 The benefits of this system is that over a period of time when the markets fluctuate, your investment is going to be marginalized and you will suffer less than if you had invested the entire amount in one go.
 That way you don't have to actually do the transactions manually and have to remember yourself to make the payment every time it is due.


Purchasing Gold using Value Averaging

Gold has been one of the many and by and large a popular method of storing assets and values.
 This is what makes it more susceptible to fall back to when there is a market crash as we saw in 2008.


A lot of people have experimented using the Dollar Cost averaging and the Value Averaging methods of investing in the yellow metal.
 Value averaging is somewhat similar to dollar cost averaging, in terms of the over all approach of investing on a monthly basis.
 Say a person has invested in some stocks to the tune of $5000.
 Say on the day the additional investment is to be made; the total price of his investment has increased to $5057.
 Similar to a dollar cost averaging method, in a market where the prices are increasing, one has to buy fewer shares and more when the prices are going down.
 This method can be gainfully used in the manner of investment into Gold.
 However over a reasonable period of time the cost of gold acquired will be marginalized reflecting a lower price.
 A lot of registered gold firms sell gold coins and bullion accepts applications.


Find the current price of gold and silver over the phone and find out everything that you need to know before placing the order.
 Once the order is verified, make the payment using a wire transfer to check payment and wait for the confirmation of the purchase being made.


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