By Md. Asfaq Uddin
To be born with a golden spoon means to be born with wealth and privilege without working for it. Those born with it, though, may take it for granted; a vehicle to show off wealth. It has always been used to show higher value, financial strength, and wealth in public places and occasions. It’s been an indicator of power and value since its discovery, a form of currency and transfer of wealth that has never failed in its glorious history of 6,000 years.
We have seen movies, TV series where mafias, dealers, kings as well as citizens pay off by gold or gold coins. In the 7th century B.C. gold was first introduced as currency. Democratic cities, state republics like The Persian Empire, The Romans used to collect their taxes in gold coins. In 1870 Franco Prussian war Germany established a gold mark and following that gold became transportable and gold received a stable unit of valuation. The standard economic unit of account used to be based on a fixed quantity of gold in monetary systems, known as the Gold Standard.
From the 2019 report of the Geological summary of the world global council, it is estimated that throughout history 197,576 tons of gold have been mined. Which would result in a 21-meter cube of gold in total if 47% of this gold is used as jewelry, 21.6% as private investment, and the rest are in official holdings, reserved below ground. Each year gold mining adds about 2,500-3,000 tons to this stack, and the scarcity of mining gold is increasing daily.
How is gold price determined?
Many nations tied the value of their currency to that of gold through the early 20th century, but the gold standard largely collapsed after WW1 because countries were reluctant to trade gold with one another. Five major London banks established the London Gold Market Fixing Limited, which was set up to determine the fair market price of gold.
The group currently meets twice a day, and the chairman announces a starting price. Each member states how many bars of gold they will buy or sell for that price; the price increases if there are too many buyers and not enough sellers, and vice versa. The price of gold is set when the number of buyers and sellers are within 50 bars of one another.
History of rising and fall
There is a saying I still remember from Nobel Prize winner Paul Krugman’s masterclass course. “History doesn’t repeat, but it rhymes”.
From 1986 to 2017, the price of gold has increased by 200%, but there is no magic formula to predict the rise or fall of a price without knowing the market. Analysing some factors can help determine what affects the price of gold.
To increase the demand, the Federal Reserve conserved the dollar by increasing interest rates, which, in turn, brought international investors looking to buy foreign assets with gold. Between 1979 and 1980, the price of gold reached up to about $820 USD. The wave in crude oil price is one of the notable facts of inflation of 1981. The spike was caused by global energy inflation, with global political instability, sent gold investors into a final panic buying of gold made it possible for gold to spike high from $193.57 in 1978 to $616.75 in 1980.
There was a very noticeable rise in gold prices from early 2005 to August, 2011, except during the 2008 financial crisis. Doing a bit of digging, we see that there was an increase in demand and supply from both Chinese and Indian economies.
Conversely, there was also a noticeable fall in the gold price from August, 2011 to September, 2018. It dropped from $1870 to $1050 in December, 2015; unsurprising, because of the financial crisis and a subsequent period of major Bubble run-up. From 2006, gold began to be in a mean track around the US $1200 and it ended up in September 2018.
Gold prices have been increasing since 2018 with the current price around $1,774 but still not higher than the record of $1,888 in September, 2011.
COVID-19 and Gold
There is an uncertainty in economic growth due to the current pandemic. It is causing a recession, and some countries are printing more currency, lowering their interest rates to manage unemployment, and investing in small businesses. So, the more negative news on economic growth, the faster the increase in the price of Gold.
To cover this current rise in unemployment, USA has printed 2 trillion USD. It may help them control unemployment, but there will be too much cash in the economy when things finally settle down, and it will take the price of goods and necessity in a rise and will cause inflation. Inflation causes a devaluation of the currency resulting in a loss of purchasing power. For example, if the government says inflation is 2%, you’ll lose 2% of your purchasing power every year. In reality, true inflation may be closer to 5% or higher. If you add that up over 10 years, you are losing 50% of your purchasing power to inflation. The United States currently has inflation of 0.62%, which may increase later because of the money injected into the current economy. Inflation and devaluation of currency take the demand for gold up and causes the price to rise. A point worth nothing, though, is that inflation doesn’t necessarily mean betting on gold is a good idea.
When does the price go down?
The fluctuation of the price of gold depends on what the central banks and governments are doing with their money. When the Federal Reserve ends it’s economic stimulus programs after financial crises, it often lowers inflation and this increases the interest rates, causing a decrease in the price of gold.
Geopolitical scares and the threat of international financial instability have always been excellent anchors for gold prices. During times of economic crises, gold and other precious metals appreciate in value. Simply put, unstable geopolitical situations make for the perfect time to invest in gold.
If bad news is causing stock markets to fall, gold investors may get an interest in selling gold to finance losses of other assets. This causes the gold price to go down. The more supply of gold, the lesser its value. Just like the overflow of money in the market and economy. – the same theory applies to gold.
Investing in 2020
We are losing purchasing power because of inflation. Most assets we own are probably in currency and if a currency is losing value, then our assets are not going up. This raises the question, how well are our value shares doing in such a scenario? For the last 15 years, gold has averaged over 9% growth.
Our international stock market has been doing well for a decade and we can assume it will do well for another 10 years. We must ask, then, if the economy is doing well, why is the Federal Reserve lowering the interest rate and flooding markets with billions and trillions of dollars.
The COVID-19 situation may change with viable medicine or vaccine and gold could move in different directions referring to the 2011-2018 bullish period of gold price fall. To look at the price of gold, we should look at the global economic situation, what the Federal Reserve is doing, what other economies are doing. gold is not bound with anything, but it definitely has a little impact on everything.
Till then the global debt is about $260 trillion. Who is going to pay that off and what will be the value of our currency when they do?