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Golden Value

Golden Value

Of all the precious metals used as currency throughout human history, gold has undoubtedly been the most popular. Not only is it an evidently alluring material, but it also has been continually recognised as a secure investment, due to its close ties with futures contracts and derivatives. The gold market seems to stand strong in spite of those vagaries that weaken other investments, earning it a reputation as a trusted safe haven. Interestingly gold has long been regarded as having a close affinity with money. In fact the earliest paper bank notes were printed as gold certificates and issued during the 17th Century, courtesy of Dutch and English goldsmiths. At that time many of the more wealthy customers were known to keep a small deposit of a single gold bullion in their private vaults. Indeed gold was everywhere, but only in very small quantities. However, it wasn’t until around two centuries later that the gold certificates finally crossed the pond and hit the towering shores of the United States. Then, in 1863, the US Treasury began to offer these certificates that could be exchanged for a gold, right up until April 5, 1933, when the US Government essentially privatised gold ownership. As a result gold certificates became less and less prevalent before they eventually stopped circulating altogether. This being said, though, for a long time these certificates were still being issued within several gold pool programs in Australia and the United States.

Throughout history gold has been recognised as a monetary equivalent, although its use and value does vary somewhat, depending on the economic region. A number of leading European countries introduced what was called the ‘gold standard’, which was a system that determined the value of a currency in terms of gold. This was abandoned, however, during the yoke of the Great Depression, in the 1930s. As it happened the last currency to be divorced from gold was the laurel-wreathed Swiss Franc, in 2000. While this meant that gold no longer had any direct link to our monetary system, with regards to the coins we carry in our hands, it didn’t affect the performance of the gold bullion, which is a fundamentally different investment property to stocks. You see, gold possesses what is called a ‘store of value’, meaning it is a stable asset which can be saved and exchanged at a later time.

Since 1919, the eminent benchmark used to calculate the valuation of gold has been rooted in London, where twice-daily telephone calls take place between five prestigious bullion-trading firms. For the most part quantities of gold are traded based on the daily spot price received from over-the-counter gold-trading markets. As with any precious commodity the cost is essentially shaped by the moving fingers of supply and demand. At the same time, though, the slings and arrows of saving and disposal have a much more significant affect on gold price than consumption. It’s fascinating when you think about the fact that gold is always changing hands, in some form or other, and that all the gold we, as a species, have mined over the centuries can still be found somewhere, whether it’s inside a huge rugged bullion or a delicate strand of fine jewellery. And yet, at the same time, it’s also supposedly true that all the gold that has ever been mined could be fitted into a cube, the sides of which would be no more than 20 metres. It sounds vaguely ludicrous doesn’t it? Well, this is reality according to the little known business magnate and billionaire, Warren Buffet.

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Speaking of folk in high places, the central banks and International Monetary Fund have both had important roles to play in the history and future of gold. By the end of 2004 central banks were presumed to own around 19% of all above-ground gold, within their official gold reserves. Due to the ten-year Washington Agreement on Gold (WAG), which began in 1999, a number of carefully drawn limits were placed on gold sales to Japan, Europe, United States and Australia. As a result, the collective of European central banks, like the Bank of England and Swiss National Bank, became the most influential gold sellers. These central banks were not required to announce their gold purchases in advance. Then, in 2005, Russia showed a keen interest in rebuilding their gold reserves. By 2006, China had also moved to gain a greater hold on this rare commodity, increasing their reserves to 1.3% – still pittance when compared to the central banks. Indeed Chinese investors are known to have pursued an alternative gold investment, inspired by the Eurozone crisis in 2011, to such an extent that they became the world’s top gold consumer, supplanting India, in 2013.

So why is gold such a popular property for investors? Well, the price of gold is interlinked with interest rates and so if interest rates drop or rise this tends to have an affect on the valuation of gold. However, because gold earns no interest, if interest rates take a nosedive then the price of gold is proven to do the opposite. Of course, there are other macroeconomic variables, from oil pricing to the application of quantitative easing, but, ultimately, gold can be stored and used to hedge against such tidal quandaries as inflation, deflation and currency devaluation.

‘The currencies of all the major countries are under severe pressure because of massive government deficits. The more money that is pumped into these economies – the printing of money basically – then the less valuable the currencies become.’

– Joe Foster, portfolio manager of Van Eck International Gold Fund

Finally, let’s look at our own area of expertise: the jewellery industry. According to recent statistics jewellery now accounts for approximately two-thirds of the annual gold demand. In 2009 India was recognised as the largest consumer of gold jewellery, taking a staggering 27% of demand on their shoulders. This was closely followed by the expected market arenas of China and USA. Funnily enough, a considerable percentage (12%) of gold is used for industrial or dental purposes, owing to its high thermal and electrical conductivity – not to mention an ability to stave off corrosion and fend off bacteria. However, the demand for jewellery and industrial gold has fluctuated these past few years, due, in part, to the market focus of disenfranchised lower/middle classes aspiring to reach more lavish Western pastures.

 

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