According to Christopher Columbus, those who had something of gold were in possession of something of great value on Earth and a substance to even help souls to paradise.
An asset that has fascinated people throughout the ages is gold. Over the years, gold has been a driving force in the history of all civilizations. Much bloodshed and wars have been fought, all centered around the quest for this shiny metal.
Great human achievements have been frequently rewarded with gold in many forms. The fascination for gold continues even to a point where financial analysts and the media closely monitor the gold commodity market.
Before World War I, the world economy used the gold standard – a fixed exchange rate regime, where the currency was converted to gold at a fixed rate, allowing exchange rates to follow a fixed exchange rate (in term of gold, not fiat money).
The biggest advantage of using the gold standard was that it eliminated the uncertainty that would have occurred when exchange rates fluctuate, which in turn encouraged world trade. Due to this, currencies are now more inclined towards keeping their exchange rates fixed and to keep their currencies backed by and convertible into gold.
After World War II, a similar system was established through the Bretton Woods Agreement (a gold exchange standard), with which many countries fixed their exchange rates relative to the US dollar, and the central banks could exchange dollar holdings into gold at an official exchange rate. All currencies pegged to the US dollar thereby had a fixed value in terms of gold.
In October 1976, the definition of the dollar was changed, and references to gold were removed from statutes, thereby the International Monetary System was made of pure fiat money.
As of 2014, no country has used a gold standard. Gold reserves are held in significant quantity by many nations as a means of defending their currency and hedging against the dollar (also known as currency reserves). Both gold coins and gold bars are traded in liquid markets and serve as a private store of wealth. The Washington Agreement on Gold, which was signed in 1999, states, “Gold will remain an important element of global monetary reserves”.
The price of gold is positively related to the expected inflation rate. Because the gold market responds immediately to any changes in expected inflation, it is considered a good barometer of the trend of inflation in the future.
For over a thousand years, gold’s combination of luster, malleability, density and scarcity has captivated humankind like no other metal. Today, gold’s most popular use is in the manufacture of jewelry, and with prices of the commodity currently trading at US$1,205.50 per ounce, it is an investment that most people either risk averse or risk lovers tend to be geared towards.
Submitted by : AB