The Value of Gold
The most popular investment worldwide, investors cling to gold in times of economic, social or political strife. In fact, throughout history, gold has been used as the standard for currency. Until this past century, the price of gold defined a country’s monetary value.
The gold standards that were implemented in the 19th century were suspended in many European countries during World War I. In 1971, the Nixon Shock that rocked the U.S. suspended the U.S. dollar being directed correlated to gold’s value. The last to disembark gold currency system was Switzerland in 2000. Today, U.S. currency is based primarily on a fiat money system, which derives its value directly from government law and/or regulation.
For almost a century, the most common pricing benchmark for gold is the London gold fixing. Twice daily, representatives from London’s five bullion-trading firms discuss gold’s pricing, which then dictates the market-trading price, otherwise known as XAU.
Like most commodities, gold is dictated by supply, demand and speculation. However, unlike disposable commodities, gold’s price is not affected by consumption. Gold still exists even once it is sold and used, whether it’s in bullions or jewelry. Gold eventually returns to the open market when the price is right. In fact, some estimates say that the amount of gold in existence could easily be melted down into a cube that measures a mere 66 feet. This means that gold is affected by demand versus supply.
The World Gold Council estimates that worldwide mine production is nearly 2,500 tonnes annually. Of this amount, 2,000 tonnes is made into jewelry and 500 tonnes is given to exchange traded funds and retail investors.
The International Monetary Fund and central banks play a vital role in determining the price of gold. In 2004, official organizations and central banks held approximately 19-percent of aboveground gold in their personal reserves.
Gold is often used as a hedge against deflation, inflation or currency devaluation. If the market’s returns on equities, bonds and real estate do not offer adequate compensation for inflation and risks, then gold’s demand increases. This is why after the real estate housing bubble burst in 2007 gold prices skyrocketed. In fact, experts predict that gold will reach an all-time new high in 2013.
The most common forms of investing gold include bars and coins. Bars and coins range in weight. Bullion coins pricing is based on their fine weight, including supply and demand.
Gold production is expected to peak from 2022 to 2025, due in large part to remote mining areas becoming more accessible with advanced technologies. This is an indication to investors that gold’s market future is strong.
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