Understanding Gold Economic Perspectives

Gold became a global monetary medium that was used along with silver to fund the accelerating industrialization that was taking place in the early 20th century. The gold standard was simply a convertibility measure through which gold coins as well as fiat money could be changed at banks into one or the other at predetermined rates. The previous financial system provided centuries of stability through the need to buy and sell gold bullion bars and coins, giving countries the ability to settle the balance of their trade differences via the universal gold standard currency used by every nation.

The gold standard provided an intrinsic deflationary pressure dues to the fact that money supply was constantly insufficient for growing economies and populations and the supply of gold was inelastic. It was at this point that the money managers of the world (government leaders and policy makers) decided to implement the ‘gold-exchange standard’ whereby currencies of primary economies were being considered as reserve assets.

However, the conviction behind the convertibility of foreign reserves was weak and fragile. It was this lack of faith in foreign exchanges that eventually led to the Great Depression. After the end of World War II a new international monetary system was established (the Bretton Woods system). The system was progressing well until the 60s but eventually put the United States of America in a dilemma due to it being the sole reserve currency nation in the world and to make matters worse the domestic pressure of maintaining their local economy started to suffer as sustaining economic growth and keeping employment rate low and the pressure to stabilize the value of the dollar were at odds.

The increasing domestic expenditure and the Vietnam War corroded the situation further. Eventually the U.S. government put the Bretton Woods system to end in the early 70s and one of the primary reasons that they did this was because most people on the planet began viewing the gold and the US dollar as an asset (gold was being seen as a currency that reflected the value of the mighty greenback) which even up to now has blurred connections between gold and dollar.

One must realize that the demand for gold is ever increasing while the gold supply is on the decline and the demand for gold stemming from India and China have severe influences on the price of gold which is driven towards volatility due to speculation. If volatility is a factor in gold as a commodity, is it a safe haven to convert assets to? Based on historical price movement gold being a safe haven in the short run is not evident, however in the long run it does maintain a positive course.

Between 1978 and 1980, gold prices became volatile with prices bouncing from $611 to $1897 that actually saw many earning good margins, however let’s not forget that when someone gains, someone else is bearing the loss. Thus it depends on which side you are on.


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