It is no longer possible to purchase goods at the market using gold for the most part. However, that does not stop the mining and production of this precious metal. Having been mined for such a long time, we seem to have a large amount available to us. Estimates in 2006, placed the total amount of gold that has ever been mined at 158,000 tonnes. While it is difficult to come up with a true estimate of how much gold exists in the world today, there have been some speculations. A 20 metres sided cube could possible fit the amount of gold that is above-ground, according to Warren Buffet, an investor.
History of Gold
Throughout history, gold has been accepted as currency or as an equivalent of currency. At the end of the 19th century, gold standards were implemented by many European countries. The gold standard allowed for full conversion from dollars to gold. Lighter paper banknotes were much easier to carry around, however. Also, gold was found more difficult to divide. This did not stop the value from rising, however. The rate of gold to United States dollars was $35 per troy ounce according the Bretton Woods system right after World War II.
During the Great Depression of the 1930s, a bank run resulted from fears of bank failures. This prompted National Emergency Issue Executive Order 3102 that outlawed gold “hoarding” by citizens of the US to be imposed by President Roosevelt. However, this order was ruled as invalid by Federal Judge John M. Woolsey due to the fact that it was not signed by the Secretary of the Treasure as required.
Accepted around the world for much longer than paper currency has existed, this commodity is still strong today. It is no longer considered money, however, and conversions are a thing of the past. After the Nixon Shock in 1971, the United States transitioned to a fiat currency system and suspended the dollar to gold convertibility. Other countries also suspended this conversion, as well.
Prices of Gold
Two telephone meetings a day of five bullion-trading firms has been the benchmark for the price of gold since 1919. This process is known as London gold fixing. These firms use many factors in determining the value of gold today. The Futures markets are a key driver of values. Supply and demand, including demand for speculation, is another factor that drives the price today. Demand or sentiment affects this value much more than supply or production.
Because the majority of the gold that has been mined in the past is still available in some accessible form, it is not considered a consumable resource. It has the potential to come back the market. Therefore, consumption does not play as big a role in the price that is plays in other commodities. Instead, savings and disposal are bigger contributors.
Another key factor in gold prices is the Washington Agreement on Gold (WAG) that began in September 1999 and limited sales of gold by members to 500 tonnes a year for ten years. Members of WAG include Europe, United States, Japan, Australia, and Bank for International Settlements, and the International Monetary Fund. A five year extension and smaller limit of 400 tonnes were agreed to in 2009.
In addition, interest rates that are set due to the monetary policy decisions of central banks also play a role in gold prices. It is a general understanding that these prices tend to go lower as the rates rise or vice versa. In order to slow inflation, the policies that raise interest rates may be enacted by the central banks. This would reduce the cost of gold and the chance of prolonged inflation. However, this does not always work. In 2011, the European Central bank raised the interest rate but instead of lowering the price of gold hit new highs after a muted response.
Over the past few years, nearly 2,500 tonnes of gold have been mined annually. While 500 tonnes goes for investments and exchange traded gold funds, the rest of is used in the production of jewellery or industrial, dental, or production. Two-thirds of this demand is accounted for by jewellery making.
With high thermal and electrical conductivity properties, resistance to corrosion and bacterial colonisation gold works well for industrial, dental, and medical purposes. This could explain why demand, at around twelve percent, has been fluctuating over the past several years in these industries. However, the financial crises of 2007-2010 and emerging middle classes that aspire to a more Western lifestyle may also play a role.
The rest of the gold mined is used for investments and exchanges. Gold could be a safe haven against stocks during times of stress. Many precious metals, such as gold is also used to as a hedge against inflation, deflation, or currency devaluation that can occur when a country, such as the United States, has severe government deficits. This pressure causes more printing of money, which in turn lowers the value of the currency. While it is possible that returns on bonds, equities, and real estate may compensate for risk and inflation, this is not always the case. This is when gold demand raises as happened in the 1970s. However, when this financial stress lasts for longer periods of time, values of gold could plummet.
Scandals Concerning Gold
Gold has been involved in some scandals throughout the years. There have been many claims that prices have been suppressed artificially due to market manipulation mainly centred on the London Bullion Market Association, the United States Federal Reserve System, and HSBC and JPMorgan Chase Banks. This short selling can be done in either physical or futures markets.
Naked short selling, shorting stocks without locating a source to borrow the stocks from, is the centre of these claims. This term is used more for precious metal commodities, such as gold. It has been observed that gold values fall artificially at the start of New York trading. Lawsuits were prompted when Andrew Maguire, an independent trader that formally was a Goldman Sachs trader, made the assertion that JP Morgan Chase and HSBC were behind this manipulation concerning gold and silver markets.
Recently another scandal has emerged concerning the “Cash for Gold” industry. This industry allows people to sell gold jewellery either locally or online. This multi-billion dollar industry is slowly losing trust, however, due to the large number of companies that have caught paying customers only a small amount compared to the value.
Gold is no longer a monetary alternative for the most part. That does not in any way mean that it is no longer of value to many. It can be used to make jewellery, in dental or medical procedures, in industrial machinery, or just hedge your bets concerning economic issues. This precious metal that has been a status symbol for many years is a part of our everyday lives even if it is not used for everyday shopping.