Gold & the Modern World Economy - Report Example

GOLD By 18 April 18 April GOLD Analysis & Discussion Gold is a one of the most precious metals witha chemical name Aurum. The pure gold is very soft in nature and therefore it is mixed with other metals. A pure gold is 24 karat while the gold which is turned into coins, jewelry etc. is 22 karat i.e. mixed with a copper alloy to reduce its brittleness to a workable form. “Sometimes gold miners have to dig up as many as 13 metric tons of rock to extract 1 ounce (28 grams) of gold. It takes a lot of hard work to find and mine this valuable mineral.” (Beck 11) For centuries gold has been used as a symbol of status and prestige. People value gold and perceive it to a sign of purity and success. It is a metal used for jewelry, as investments and also as monetary exchange. Gold jewelers are considered to be the most successful business as they deal in something that has only seen appreciation in value most of the time. The value of gold is quoted in financial news and it fluctuates on daily basis. The gold rates are quoted for price in dollars for gold bullion which is the raw form of the metal. All countries publish gold prices in their respective currency on daily basis. Analysts link the value to the international gold rates quoted in the global markets. The market generally shows an upward trend of the gold prices but its fluctuations are based on the demand and supply of the metal itself. The sudden surge in the gold price is attributed to the shortage of this metal as compared to its demand. But some analysts argue that gold hoarders have led to artificial price hike at times. Although international laws and regulations keep a check on the gold prices and monitor its trading in a prudent manner. Gold was used as reserve currency for many decades. The use of gold coins and issuance of money equivalent to the gold reserve has been a very common in the past. In the second half of the nineteenth century an international gold standard was established. “The gold standard was created by the free market, the citizenry, and it operates to manage the supply of paper currency under self adjusting market system.” (Lewis 103) The use of gold as a monetary exchange was abolished and replaced by fiat currencies in the 20th century. Before currencies were convertible into gold but the declining gold reserves and the increasing international trading required currency interchange and thus currencies were made legal tenders by the government and were used for transaction and reserve purposes. “The price of a thing at any moment is determined by the quantity of money which has to be given for it, but ‘the quantity of money’ is a magnitude, which is in part determined by the nature of the unit of account employed.” (Gregory 4) The price of currencies previously was linked with gold and the purchasing power of the currency would be maintained in terms of gold. The same amount of currency, irrespective o f its metallic weight, whether it is a coin or a note, would be convertible to the same amount of gold. Thus the purchasing power in terms of the value of gold would be same and this determined the value of currency as well as the gold prices. But the scarcity of gold mines and deposits around the world has lead government to remove the gold and currency purchasing power equation and has made the paper currency a legal tender for all the transactions. The same amount of currency will have the same purchasing power or not cannot be guaranteed in the fiat - legal tender currency system. The gold has now become a commodity of exchange rather than its previous function of maintaining currencies purchasing power. “In today’s government controlled fiat money system, gold has lost its monetary function. However, gold has remained a kind of ultimate means of payment, protecting investors against financial crises and inflation.” (Belke & Polleit 13) People buy gold jewels, gold bars and gold coins from the investment point of view. The investment options may differ for different people. Some people invest in real estate, while others prefer stocks and bonds giving them a regular flow of income. These people invest based on their nature of risk tolerance. Some people who can take more risk are know as risk takers and the other lot is known as risk averse investors. The investors who want a running income invest in stocks and bonds and those concerned with capital gains invest in a more risk averse real estate and gold market. However, analysts call gold the safest investment because the real estate has seen its crashes be it the US housing financial bubble or the recent Dubai crises. But gold has never seen such an abrupt decline in value and provides reliability if not guarantee for an investment appraisal. As this is the most rewarding investment, thefts of this metal is common. In order to protect it traditionally people used to hide it in secret places. However, the recent times has brought the culture of bank lockers to protect peoples gold investments. The bank lockers are also prone to security hazards and therefore these lockers are often insured depending upon the value of the metal contained in the lockers. Thus in case of banks peoples’ gold investments are more protected because in the case of any theft they get their value of the investment in the form the insured amount. Thus the precious nature of this metal makes it all the more desirable to those who can afford and sadly to those also who are not able to afford this metal. That is why safety of this metal is a big issue and is taken very seriously by the investors and holders of this metal. Like any other product, the demand and supply forces determine the price of gold. The only difference comes in the supply of hold, unlike commodities whose supply comes from yearly production; sold supply is based on past storages. The unit for gold’s measurement is troy weight or grams. The gold price id determined by the Gold Fixing, a procedure of London derivatives market used to give daily gold prices based on the trading in gold and other financial derivatives. “A highly homogenous commodity, gold is traded almost continuously in well-organized spot and futures market. Moreover, as annual production (and consumption) of gold is miniscule compared with the global stock, the gold-producing countries, whose currencies typically are not traded in organized markets, are unlikely to dominate the world gold market.” (Tcha 100) Thus gold is priced the price it holds based on the demand and supply forces. Its current price in terms of US dollars is around USD 1500/ OZ and it is due to the market demand and supply and the gold derivates. The high price of gold is based on the rare nature of this metal and the associated use of gold. The declining results in terms of gold storage has placed the gold price to the level it is now and since it’s a demand and supply law for gold with the supply being from the past storage rather than yearly production that is why it is so highly priced. The price of gold is linked with that of the US dollar a weaker US dollar will result in the higher gold price. A stronger US dollar will keep the prices of gold controlled. Internationally, the gold prices differ in terms of currencies with its net value being same. As gold inches up in the US market all the countries see an increase in the gold price based on the dollar and the local currency exchange rate. Thus the gold value determined on daily bases remains constant and the international difference in the gold prices is due to the difference in the exchange rate. The production cost of gold is linked to its supply. The production of gold involves the mining process which is very capital intensive and time consuming. Gold is not widely present and it’s deeply embedded in the earth’s crust. This presence of gold requires deep digging and drilling before miners can see the hidden gold crust. The difficulty in digging out gold from the earth’s surface results in the high production cost for gold and low supply of the precious metal. This decrease in supply with respect to demand has resulted in almost increasing the gold prices by many folds in the recent decade. Everyone now wants t invest in gold as the increase in price for this investment gives the maximum returns to the investors. The people want to hold on to gold as the increasing price of gold would add value and increase their wealth as well. The metal gold faces no competition. There are no substitutes that can take its place or reduce its demands. People investing in the currency markets may switch from one currency to the other. If they see one currency gaining over the other, then they might buy the stronger currency foreseeing better gains on their investments. But an investor would never trade gold with any other metal like silver or even stones like diamond. Because the demand for gold is not competing with silver and diamonds. It is an independent investment and the most profitable one for the investors. The investors’ rate of return on deposits, and other bonds and long-term instruments are not comparable with the returns obtained from holding their investments in the form of gold. In the international market it is a hot commodity. Gold derivatives are the talk of the derivatives markets today, attracting more and more investors into understanding the complex nature of the derivative market. Thus, gold is a precious metal; its high price is due to the demand and supply imbalance. The supply side is weak because it is based on the past storage of gold and is affected by the capital intensive production costs. The international price of gold varies based on the exchange rate difference of currencies. This metal has no substitutes and is witnessing a price hike greater than any other financial commodity. References Cited Beck, Gail. Gold. Toronto: Benchmark Education Company, 2006. 11. Print. Belke, Ansgar, and Thorsten Polleit. Monetary Economics in Globalised Financial Markets. New York: Springer, 2009. 13. Print. Gregory, Theodor Emanuel. The Gold & its Future. New York: Arno Press Inc., 1979. 4. Print. Lewis, Nathan K. Gold - The Once & Future of Money. New Jersey: John Wiley & Co., 2007. 103. Print. Tcha, MoonJoong. Gold & the Modern World Economy. London: Routledge, 2003. 100. Print. Read More