Gold

 

How Gold Became One of the Most Important Commodities Today

 

One of the world’s most precious metals is gold. It has financial as well as cultural and emotional value. People all over the world buy gold for different reasons.

Choose your quick section of our Quick overview of Gold below:

 

Quick Overview of Gold

✔️Gold: a brief history
✔️How gold became a store of monetary value
✔️The role of the gold price in the global economy today
Why gold has become a popular investment

 

Gold: a brief history

 

Gold has been a part of the human consciousness since the time of the early hominids, when it was dispersed in streams and in the ground across the ancient world.

This lustrous metal occurred widely across the geological world, where it was first discovered by many different cultural groups, becoming the most recognized metal to the human race.

Apart from its natural beauty, gold is also the most workable metal due to its pure state, making it easy to smelt. As a result, gold became widely used for ornamental purposes, and through this use gained great cultural significance for many ancient peoples.

As a metal which cannot rust or become eroded, gold was broadly associated with deities and royalty in early civilizations, forming an important link to the idea of permanence, and even immortality.

In this way, gold attained an intrinsic value for cultural groups around the world before it became a representation of monetary value, and there is much historical data which attests to the great lengths to which ancient cultures would go in order to mine this precious metal.

Some of the most prominent ancient civilizations, such as the Phoenicians, Egyptians, Indians, Hittites, Chinese, and others, would send their prisoners of war to work in gold mines to excavate the metal that had become the earthly manifestation of deific power.

Gold was used to beautify shrines, and the idols of the ancient gods were erected in gold, while kings were crowned in gold and their queens were adorned in marvellous golden jewellery.

As early as 2600 BC, the ancient Mesopotamians forged gold jewellery, paving the way for a variety of aesthetic decorative uses, while in 1223 BC the iconic boy pharaoh, Tutankhamen, was entombed in a magnificent shrine made primarily of gold.

A fascinating aspect of this early global quest for gold amongst ancient civilizations is that it occurred before gold had any official monetary value, so that it was highly sought after for its rarity and desirability as a commodity alone.

As such, the cultural value of gold was recognized around the world, where it became inherently associated with the notion of royalty and power.

As a result, the value of gold was intuitively recognized as an intrinsic emblem of status, a significance which has been retained throughout the ages, and is still present in most cultural groups today.

This desire for gold in turn furthered many of the technological advancements of the ancient world.

The Roman Empire greatly expanded their mining capabilities as a result of their global search for gold, advancing the science of gold mining considerably.

The Romans were the first to develop hydraulic mines in order to excavate gold present in streams and rivers, and introduced sluices, water-wheels and the so-called ‘roasting’ of gold-bearing ores to separate the gold from rock.

In this way, the search for gold became largely responsible for many developments in early human history, and later became the basis upon which global economic expansion could occur.

 

How gold became a store of monetary value

 

The first known record of the use of gold as a currency was found in Lydia, located in Asia Minor around 600 BC, when the Lydians began to strike gold into coins which were called ‘talents’.

As such, the measuring out of gold became inextricably linked to the first concept of ‘money’ as it is understood today.

Apart from the rarity and beauty of the metal, the natural properties of gold which allowed it to be easily melted made it an obvious medium of trade.

Where gold had furthered technological advancements in the ancient mining industry, it also gave rise to the very concept of trade as a portable, private and permanent means of exchanging goods.

Payment in gold coins was an easier and more convenient means of determining the value of an item than the earlier bartering system, and facilitated the rise of global trade during the Classic period.

This new monetary system made possible the existence of a world economy, allowing local economies to expand and prosper significantly.

Gold was recognized as a more valuable currency than silver due to its greater weight, giving rise to the notion of an item being ‘worth its weight in gold.’

During the Classic period of Greek and Roman rule in the western world, gold and silver both flowed to India for spices, and to China for silk. At the height of the Empire (A.D. 98-160), Roman gold and silver coins reigned from Britain to North Africa and Egypt.

As such, money had been invented, and money was gold.

During the thirteenth and fourteenth centuries, European economies restructured their minting system from the earlier preference of silver to gold.

This developed from the recognition that the inherent permanence and desire for gold made for a more stable means of determining the purchasing value of traded goods.

In 1300, the first hallmarking practice for determining and verifying the quality of precious metals was established at Goldsmith’s Hall in London.

By 1422 the state of Venice had minted a record of 1.2 million gold ducats coins which were easily minted and carried a high value.

One of the mist significant developments in the use of gold as a currency occurred with the establishment of the Gold Standard by the United Kingdom in 1717, when the British government linked the value of 77 shillings to gold at mint price.

The Gold Standard created a monetary system whereby a country’s currency or paper money value was directly linked to gold.

Across the global economy, countries agreed to convert paper money into a fixed amount of gold, allowing these countries to set a fixed price for gold which was bought and sold at that price.

This price was then used to determine the value of a country’s currency, which would either increase or decrease according to that country’s gold stores.

One of the benefits of the Gold Standard was that the physical quantity of gold acted as a limit to the issuance of currency, thereby allowing these economies to avoid the effects of inflation, promoting a stable monetary environment.

In the decades prior to the First World War, international trade was conducted on the basis of what has come to be known as the classical gold standard.

Using this system, trade between countries was settled using physical gold, so that countries with trade surpluses accumulated gold as payment for their exports.

Conversely, nations with trade deficits saw their gold reserves decline, as gold flowed out of those nations as payment for their imports.

The use of the Gold Standard began to deteriorate with the onslaught of the First World War, as global alliances began to change and more countries became indebted to one another.

The Gold Standard was suspended during the war, leading to a lack of confidence in its reliability and the recognition of the need for a more flexible monetary system.

As the gold supply continued to fall behind the growth of the global economy, the British pound sterling and U.S. dollar became the global reserve currencies.

After the Second World War, the leading Western powers met to develop the Bretton Woods Agreement, whereby all national currencies were valued in relation to the U.S. dollar.

The dollar, in turn, was convertible to gold at the fixed rate of $35 per ounce. Today, the global financial system continues to operate using a gold standard, which is now indirectly linked to the dollar as a reserve currency.

 

The role of the gold price in the global economy today

 

As a result of the agreement to link global currencies to the dollar, the relationship between gold and the dollar has gained particular significance in the global economy today.

Gold prices are an indication of the overall state of the US economy, so that when gold prices are high, it means that the economy is struggling.

Conversely, low gold prices mean that the economy is doing well, which makes stocks, bonds or real estate more profitable investments.

 

Why gold has become a popular investment

 

With the gold price acting as the barometer for economic performance, investors buy gold as a protection from both economic crisis and inflation.

The gold price is also a reliable means of measuring market sentiment, as the gold price reflects the confidence of commodities traders.

If these traders believe that the economy is suffering, they will buy more gold as protection, and conversely buy less gold when the economy is doing well.

As an example of this process in action, in 2016, the U.S. stock market entered a stock market correction. As the Dow Jones Averages fell, gold prices rose.

From an investment perspective, gold is always a good hedge when other investments appear too risky.

Typically, investors will buy gold for three reasons, namely to offset market declines, to counteract a declining dollar, and as already noted, to hedge against inflation.

However, while gold is considered a safe haven investment, the commodity is also susceptible to sudden market movements, and the higher the gold price, the riskier the investment.

To this end, gold is an excellent diversifier in a well-balanced portfolio, as it typically demonstrates almost no correlation to equities.

Therefore, the gold price will not necessarily fall in a stock market crash, and its value is likely to rise as interest rates fall.

At lower levels of interest rates, investors have a lower cost of carry (or opportunity cost) for holding gold.

For South African investors, the prevalence of the mining industry has created an environment in which shareholders benefit from a high US$ gold price and a weak rand.

This in turn creates the potential for higher corporate profitability and above-average share price gains over time in the mining industry.

That said, this potential will also be determined by how much production is possible under prevailing market conditions.

In the global economy, gold has remained one the few stable assets which has remained strong in value during the global coronavirus pandemic and its resultant market sell-off.

The commodity gained 8% in the three months to 30 April 2024 and nearly 34% over the last year.

As a safe-haven asset, its price has risen from around US$1,280 per ounce at the start of 2019 to trade around US$1,717 per ounce at 30 April.

Economic analysts anticipate that the gold price is set to rise significantly as the global pandemic continues, making it a good investment for later profitable sell-offs.

Price momentum resulting from the economic impact of the pandemic caused the yellow metal to have an exceptional performance in the first half of 2024, increasing by 16.8 per cent in US-dollar terms and significantly outperforming all other major asset classes.

The high uncertainty stemming from the pandemic coupled with positive price momentum is expected to have a positive impact on gold investment going forward.

This has already been seen towards the end of June 2024, when the gold price was trading at levels not seen since 2012, and escalating to near-record highs in all other major currencies.

As has been witnessed during most other historical times of uncertainty, gold benefited from investors’ need to reduce risk, with the recognition of gold as a hedge further underscored by the record inflows seen in gold-backed ETFs.

As such, gold’s effectiveness as a hedge may help mitigate risks associated with equity volatility, and investors may consider gold as a viable substitute for part of their bond exposure.

In this event, the detrimental fall out of the coronavirus pandemic could be the very reason why gold is an excellent investment option for the foreseeable future, with gold prices edging higher after every spike in coronavirus cases.

All told, the gold price is likely to remain a well-supported investment going forward, bolstered not only by ongoing economic uncertainty over global growth, but also by the massive amount of monetary stimulus put in place.

These stimulus packages are likely to keep interests very low for the foreseeable future, making gold a good investment option today.