A BRIEF GOLD COMMENTARY FROM 3000 BC THROUGH 2009
A Historical Summary of Gold
Historians believe gold was the first “precious metal” that was mined by humans many thousands of years ago. It requires little processing and the malleability of pure gold makes for easy metalworking. Ornamentation and jewelry were likely its first uses. Today, about two-thirds of newly-mined gold goes to the jewelry industry. The remaining third is for the electronics and dental industries, coinage and bullion, aerospace, glass-making and decorative gilding.
In times of economic turmoil, gold has been considered a safe haven. It has been used all over the world as a medium of exchange and a form of currency for more than 5,000 years. Its relative rarity and beauty made it a natural choice for early forms of currency. And it is not dependent upon any state or government. Unlike paper currency, bonds or notes, gold is not someone else’s liability. Its worth comes from the willingness of people throughout history to assign it a specific value. The fact that it is a relatively transportable form of wealth hasn’t tarnished its luster, either.
From its original use as ornamentation to becoming a baseline currency, how does gold fit into a 21st century investor’s portfolio?
The Gold Environment
It’s a challenge to compare gold and equities as they are two fundamentally different asset classes. Gold is a store of value, a way to maintain wealth over time.
The circumstances in which equities thrive are not correspondingly suitable for gold. Equities do well when there is low inflation (and no deflation), a stable currency, steady economic growth, strong property rights, the rule of law and, most of all, political and economic stability. The conditions conducive for gold are the exact opposite.
So what’s happened over the past decade? From 2001 to 2008, the global economy was hit with significant inflation. (Some blame the U.S. Federal Reserve for that, caused by the ultralow rates the Fed instituted in the wake of the 2001 market crash.) Over that period, oil rallied from $25 to nearly $150 per barrel; most commodities doubled or tripled in price. Food prices soared. Over the same period, the value of the U.S. dollar fell some 40 percent.
The 2008 and 2009 recession has brought about a deflationary period. Since 2008, oil has lost two-thirds of its value and home prices around the world have fallen 30%. From the peak in October 2007, major stock market indexes in industrialized nations have been cut in half, while the emerging market indexes have lost about 75% of their value. Add to this the economic instability brought on by the credit crisis and you have ideal conditions for appreciating gold prices.
The Performances Of Gold Versus Stocks
Besides the trading of international currencies, the retail Forex also offers an exchange of gold and silver with the US dollar. Note: as of June 10, 2011, in compliance with the Dodd-Frank Act, most US domestic OTC Forex retailers may be prohibited by law from offering gold and silver trading on their listed trading options. Offshore brokers will continue to offer metals trading, along with other standard currency pairs.
In the world of metals trading, traders do not physically take possession of the gold or silver they trade. Rather, they engage in electronic transactions through brokerages with the ability to enter the market, placing protective stops and exit points, referred to as limits, for the taking of profits. The exchange allows traders to hold trades in the markets for longer periods of time while in some cases earning daily interest if trading in the direction that the broker is paying interest.
Gold Throughout The Ages
3000 BC – The Egyptian and Sumerian civilizations in southern Iraq use gold and gold leaf for jewelry and decorative objects.
1500 BC – Gold becomes the currency for international trade, making Egypt a wealthy nation. About
150 years later, Egyptian King Tutankhamen is buried in a 2,448-pound gold coffin
500 BC – The first pure gold coins are minted in Lydia, a kingdom of Asia Minor.
58-50 BC – Julius Caesar repays Rome’s debts from all the gold seized in Gaul. The Romans issue a gold coin called the Aureus.
1284 AD – Venice creates the gold ducat, which soon becomes the most popular coin in the world and remained so for more than five centuries.
1511 – King Ferdinand of Spain sent explorers to the Western Hemisphere with the command to “get gold.”
1717 – Sir Isaac Newton, master of the London Mint, sets price of gold that lasts for 200 years.
1792 – The Coinage Act places the young United States on a silver/gold standard, with the U.S. dollar equivalent to 371.25 grams of fine silver/24.75 grains of fine gold.
1803 – North Carolina is the site of first U.S. gold rush. The state supplies all the U.S. Mint’s domestic gold coined for currency until 1828.
1848 – The California gold rush begins.
1859 – The Comstock Lode of gold and silver is discovered in Nevada five years later. Nevada becomes a state.
1933 – To help calm Depression Era economic panic, F.D.R. bans the export of gold, halts the convertibility of dollars into gold, and establishes a daily price for gold.
1934 – Roosevelt fixes price of gold at $35.00 USD per ounce.
1944 –The Bretton Woods Agreement creates the International Monetary Fund (IMF) and World Bank and sets international gold exchange standard with par values for currencies in terms of gold.
1973 – The U.S. dollar is removed from the gold standard and gold prices are allowed to float freely. By June, the market for gold in London reaches more than $120.00 USD per ounce.
1974 – The U.S. government ends its ban on individual ownership of gold.
1997 – Congress passes the Taxpayers Relief Act, allowing American IRA holders to buy gold bullion coins and bars for their accounts as long as they are equal to or exceeding 99.5 percent pure gold.
1999 – The Euro is created, backed by a new European Central Bank, which holds fifteen percent of its reserves in gold.
2008 – The price of gold passes the $1000.00 USD mark, reaching $1,011.00 USD in March.
Excerpts and other material contained in the preceding historical article are from commentaries and articles authored by B. Rithotz, published June, 2009 in Delta Airlines Sky Magazine.
Present news of Gold within the world
Sept. 2009 – Hong Kong government reserves announce that they will remove all gold deposits from London banks and place them in top security areas located close to their national airport and not in their banks.
What does this removal of gold mean? How important is gold to the world’s economy when during the effort to revive world economic stability, China, a major gold player, moves gold from bank security to private holding areas? China began buying massive amounts of gold in 2003, creating stability to their country’s currency and today, many economic authorities believe that during the global economic unrest in 2009, China remains possibly the most financially viable country in the World.
Foreign currency traders are now trading gold and other metals against the dollar, as well as other currencies. Not all brokers are participating, but each year, more brokers are offering gold against the dollar in the belief that the pair represents a stable combination. The proprietary charts provided through www.ForexCurrencyWorld.net’s educational source include not only over sixteen Forex pairs, but gold/dollar and silver/dollar combinations as well. Many traders believe the oscillators included in the charts will provide an advantage in the markets to procure long term profits, as well as quick cash opportunities.
Recently, the Forex has introduced a pairing of gold with the US Dollar, implemented by retail brokers and enabling traders access to trade gold by electronic transactions. Traders do not physically hold the metal. Rather, through online trading platform, traders may enter the market, buy or sell positions, place protective stops, as well as establish exit points, also referred to as limits for taking profits. The exchange allows trades to be held for longer periods of time and in some cases, positions may earn daily interest if trading is in the direction wherein the broker is paying interest. (See note above about Dodd-Frank restrictions on retail OTC Forex trading of gold and silver in the US after June 10, 2011.)
Although some brokers offer traders the opportunity to trade the gold against the dollar, the cost of spreads (broker fees) can reach as high 90 to 120 pips; these high spreads may discourage many traders to even consider placing trades on the metal/dollar combination. With a bit of research, there are a few brokers who offer tighter spreads for the metal markets. www.ForexCurrencyWorld.net is familiar with several reputable brokers offering narrower spreads.
Author: D. Snellgrove © 9/4/2009