What is gold？
Definition
Some argue that gold is a barbaric relic that no longer retains the monetary qualities of the past. In the modern economic environment, paper money is the currency of choice. They argue that gold's only advantage is that it is the material used in jewelry. On the other hand, there are those who argue that gold is an asset with many intrinsic qualities that make it unique and essential for investors to hold in their portfolios.
A Brief History of Gold
To fully understand the purpose of gold, we must go back to the early days of the gold market. The history of gold in society begins long before the ancient Egyptians started making religious jewelry and artifacts. However, that was only about 560 BC. that gold began to act as a currency. At the time, merchants wanted to create a standardized, easily transferable currency to simplify trade. Creating a stamped gold coin seemed to be the answer, as gold jewelry was widely accepted and recognized in many parts of the world.
After the advent of gold as currency, its importance continued to grow throughout Europe and Great Britain, with relics from the Greek and Roman empires prominently displayed in the Museums around the world and Britain developed their own metal-based coins in 775. The British pound pound sterling (representing a pound of silver), shilling and pence were all based on gold (or silver) amounts. ) that they represent. Finally, gold symbolizes wealth throughout Europe, Asia, Africa, and America.
The U.S. Bimetallic Standard
The US government continued this gold tradition by establishing a bimetallic standard in 1792. The bimetallic standard simply stated that every unit of currency in the United States must be backed by gold or silver. For example, one US dollar is equivalent to 24.75 gold grains. In other words, the coins used as change simply represent the gold (or silver) currently deposited in the bank.
But that gold standard didn't last forever. During the 1900s, a number of important events eventually led to the transition of gold out of the monetary system. In 1913, the Federal Reserve was established and began to issue promissory notes (our current version of paper money) that could be exchanged for gold on demand. The Gold Reserve Act of 1934 gave the United States government ownership of all gold coins in circulation and ended the minting of any new gold coins. In short, this act begins to establish the idea that gold or gold coins are no longer needed for currency. The United States abandoned the gold standard in 1971 when its currency was no longer backed by gold.
Gold in the Modern Economy
While gold no longer supports the US dollar (or other global currencies for that matter), it is still important in today's society. It remains important to the global economy. To confirm this point, it is not necessary to look beyond the balance sheets of central banks and other financial institutions, such as the International Monetary Fund. Currently, these institutions are responsible for holding nearly one-fifth of the world's surface gold supply. Additionally, several central banks have increased their existing gold reserves, reflecting concerns about the global economy in the long term.
Gold Preserves Wealth
The reason for the importance of gold in the modern economy lies in the fact that it has succeeded in preserving wealth for thousands of generations. However, the same cannot be said for paper denominations. To make it easier to understand, consider the following example:
In the early 1970s, an ounce of gold was worth $35. Let's say at that point you have the choice of holding an ounce of gold or just holding $35. Both will buy you the same thing, like a brand new suit or a luxury bike. However, if you had an ounce of gold today and converted it at today's prices, that would still be enough to buy a brand new suit, but not the same for $35. In short, you will lose a significant portion of your wealth if you decide to hold $35 instead of an ounce of gold, because the value of gold has increased, while the value of a dollar has decreased. due to inflation.
Gold As a Hedge Against the Dollar
The idea that gold is an asset is even more important in an economic environment where investors are faced with a falling US dollar and rising inflation. Historically, gold has acted as a hedge against both of these scenarios. With rising inflation, gold usually rises in price. When investors realize that their money is losing value, they will begin to position their investments in a durable asset that has traditionally held its value. The 1970s were a prime example of gold prices rising amid rising inflation.
The reason gold benefits from a falling US dollar is because gold is priced in US dollars around the world. There are two reasons for this relationship. First, investors who intend to buy gold (i.e. the central bank) must sell their US dollars to complete this transaction. This ultimately caused the US dollar to fall as global investors looked to diversify away from the dollar. The second reason has to do with the fact that a weaker dollar makes gold cheaper for investors holding other currencies. This translates into increased demand from investors holding currencies that have appreciated against the US dollar.
Gist
Goldbugs often encourages investors to own precious metals as part of a diversified long-term portfolio.
Gold is considered a hedge against inflation and a store of value against being thick and thin.