Modern value of the gold - Essay Example

GOLD IN THE MODERN WORLD Gold has been a significant part of finance of a region since ancient times. Different regions used gold for financing purposes in different forms. Some used gold for trading purposes while in other kingdoms gold coins are used for exchanging goods and services. However, in modern world, gold has become a significant part of financial and monetary markets of any country and also of the world as a whole. The history of gold is as old as the man itself. It is considered to be the first metal discovered by man. It is considered as one of the most beautiful of all metals. Ancient Egyptians made artifacts, idols and nuggets of gold. The revolution in the history and importance of gold began with the invention of gold coins. The art was started in Egypt which slowly reached Athens in 500 B.C. This development made gold an integral part of the economy of any kingdom. A number of metal ore deposits were found in Sifnos and Thasos in ancient Greece. These metals were used for making a wide variety of goods for consumption as well as trading purposes. One main purpose for which these deposits were utilized was the preparation of gold coins. The coins were basically made of electrum which is an alloy of silver and gold. The art of coinage, beginning from Lydia, reached in Athens in 550 B.C. these coins were initially used for large scale trading purposes only. However, these coins played a number of roles in ancient Greeks later on. They provided a medium through which goods may be exchanged. Thus, an alternative for barter trade was provided. They served as a source of revenue to the state. They were also considered as a type of metal resources which were mobile and may be delivered easily. Later on, the softness and glitter also make the gold fit for the purposes of making jewellery and ornaments. The need and importance of gold has changed dramatically since the World War I. The inflation occurred in US and UK in 1914 was slowly overcome and the stability is reinstated in 1921. In 1929, collapse reoccurred when the rising values of bonds created depression in economy. However, the increased debt burden was reduced in 1935 by increasing the paper money value of gold and thus, devaluating the currency. Later on, five main central banks decided to fix the paper money value of gold to $35 per ounce in order to avoid any further devaluation of money. These banks kept the value of gold stable since 1969. After 1969, inflation period set in once again and again debt was built-up which lasted to 1981 after which stability occurred once again. The whole of the monetary system of the present day world is based on gold. The gold by each country is held in treasuries and in Central banks. The issuance of paper money is also in some countries is based on gold. Some countries restrict the percentage of reserves that should be present in the Central banks for the issuance of paper money. This has strengthened the financial sector of these countries by controlling the inflation that would otherwise occur. This is due to the reason that cash can be debased but gold cannot. Gold has gained such a great importance that all the monetary reserves of World bank basically rest on gold. Thus, it is the main constituent of the total monetary reserves of the World Central bank. Almost ninety percent of the total International Monetary Reserves of the World Central Bank constitute gold. In 1944, ninety percent of these gold reserves were held by USA alone. However, now this ownership has reduced to 28% only. A large proportion of these reserves are now under the hold of Euroland. The history of gold shows that it is one of the basic constituent of the reserves contained by the Central bank of any country. The price of gold is also much stable than any other monetary unit. Thus, it is considered that investment in gold means investment in real money. It is held by many economists that due to the stability of gold value, irrespective of market situation, it is much safer to invest in gold. The main reason for this is the stability of the investment made. The investment in gold is not changed frequently and thus, the investment account may be better represented. The uses of gold have also increases its importance to a great extent for investment purposes. It has a wide variety of usages ranging from jewellery making to electrical appliance usages and finally to usages for travelling in space. Gold is also considered as currency as it fulfills the purposes of a currency. However, it is the only currency which is not controlled by any government. Despite any regulations, the value of gold is free from any government regulations. It also does not need any protection by the law of any country. Thus, the economic depression of any country cannot control the value of gold which goes on increasing in the world today. Gold has also a tendency to maintain its value unlike other investment options. It tends to keep its value even in the most crisis situation. In the depression period, it seems very much difficult for investors to invest in stock market, low-yielding funds in banking sector. The only safe option remains with the investor at that time is to invest in gold as gold has a great potential of appreciation in its value. If we look up the increase in the value of gold, it becomes known to us that the value of gold is increasing continuously. The pace of increase is also accelerating. By the end of 1968, the price of gold was $35 per ounce. The value increased steadily when a sharp shift is found in the year 1980 when the gold value crossed $850 per ounce. However, this abnormal shift was overcome in the upcoming years. However, this high value was set due to investment in gold at a large scale made by the investors. Such high investment took place as a result of high inflation. The inflation has always caused an increase in the value gold. Some other reasons which caused such investment was the Soviet-Afghan War, high oil prices and Iranian revolution, this increased the demand of the gold to a large extent. As a result, the prices were set to $850. However, the price gradually returned back to normal 0f $300-400 in the later years. However, the price of gold has been increasing rapidly since 2004. The value of gold in 2004 was 400 USD per ounce. By the end of 2008, this value had increased to 1000 USD per ounce. It means that the value has increased to more than double in just 4 years period. The market price of gold is now approaching to 1500 USD per ounce, approximately four times more than in 2004. The recent trend in gold prices show that the value of gold will increase with an accelerating pace in the coming years. It is also not possible to control the price of gold. The value of gold will tend to increase. However, for financial sector, it is of great importance. In short term, it may seem beneficial for the financial sector as increase in value of gold will decrease the debt burden for many institutions. However, increase in value of gold will definitely cause inflation which is detrimental to the financial sector and economy as a whole. Regulations are required to be framed to come down upon the financial issues that are incidental to and may occur in future due to the increase in gold value. However, effective monetary and fiscal policies may assist to frame strategies as a proactive approach to deal with such problems. On the other hand, financial sector may also play an effective role in dealing the issue. However, only collaborative working of the financial departments and governments may make preventive measures before the crisis sets in. References: 1. R. Peter W. Millar CA. “The Relevance and the importance of Gold in the World Monetary System.” Orton, Moray. 2. Sea Gypsy Online. History of Gold. 26th April. 2011. 3. Wikipedia. Economy of ancient Greece. 26th April. 2011. 4. Financial and Legal Services. Why Investing in Gold is Often the Most Financially Stable Option. 26th April. 2011. Read More