Investment in Gold and its effect on the society Essay

Gold is the most popular form of investment of all the precious metals. Many investors in the contemporary society prefer to buy gold as protection against crisis that may emanate from changes in the political, economic, social or financial systems in the society. Political economy has great impact on the economic development of a country because of the interaction between the economy and the society . For instance, a crisis may be caused by political instability triggered by social unrest or war, decline in market investment, inflation, currency failure and burgeoning of a national debt. The popularity of gold in investment has resulted to the establishment of a gold standard. The term â€Å"gold standard† refers to a monetary system whereby the standard economic unit of an account is defined by a certain fixed weight of gold. Investment in gold can have negative and positive impact on the society. This paper will discuss the issue of investment in gold and how it affects the society. Issues that will be addressed include how and why gold serves as money in the monetary system. In addition, how tightly the gold is tied to the movement of money as well as the ancient history and legends on gold will be covered. Discussion Importance of gold in the World Monetary system The human lust for gold has been witnessed since the existence of ancient races and civilizations. Throughout history, gold has always been used as a relative standard for currency and a form of payment. Ancient civilizations used gold coins as money because of their high value and lack of paper money. However, even after the introduction of paper money, the significance of gold in the monetary system remained. In the late nineteenth century, gold standards were introduced in various European nations. However, the gold standards were affected by a financial crisis that was witnessed during the First World War. During the war, the US and Great Britain were some of the countries that suspended the strict Gold Standard but Great Britain returned to the gold bullion standard in 1925. The significance of gold in the monetary system increased after the World War II when gold was pegged to the US dollar by the Bretton Woods system. Back then, the US dollar value to the gold was pegged at the rate of $35 per troy ounce. The system was eliminated after 1971 when the US made unilateral suspension of direct convertibility of the US dollar to gold. Trading in gold has maintained its importance in replacing money. In the US, the important role of gold was evident in 1975 when trading in gold for delivery was done in New York Commodity Exchange and Chicago International Monetary Market in 1975 . In 1980, the International Monetary Fund (IMF) sold about one third of its gold holdings and in 1986, the American Eagle Gold Bullion coin was introduced by the US Mint. Over the years, gold has maintained its high value and significance in the world monetary system in the contemporary society. Currently, gold continues to be traded across the globe on the basis of intra-day sport price which is derived from gold trading that occurs through the counter in gold-trading markets. The high demand and supply of gold drives the price of gold just like in other many investments. However, disposal and hoarding of gold affects its price in the market because there is more gold that exists to be supplied in the market for the right price. For centuries, gold has been the foundation of monetary systems hence as an investment is considered to be very critical in the global monetary system. This is because it does not generate income hence its intrinsic value is measured based on the Central Bank International Monetary Reserves. Many governments acknowledge the significance of gold in stabilizing the economy . For example, the end of British Gold standard in 1914 paved way for the World War I inflationary financing. The end of the monetary inflation in 1921 on the other hand resulted to stability in the United Kingdom and the United States. This stability resulted to positive effects on rising Bonds and Equity market prices and interest rates. Due to the need to maintain the role of gold in the economy, the Bretton Woods in 1944 ratified the US Gold Exchange Standard of 1935 . Central banks in various influence the gold price and countries can limit gold sales. For example, 1999, limitation of gold sales by the members of the Washington on Gold (WAG) who included Japan, Europe, US, Australia, the IMF and International Settlements was done. The countries limited gold sale to less than 400 tones per annum. Due to the high value of gold and its importance in the monetary system, ancient history and legends have confirmed how important gold has been for centuries. For example, ancient stories have pointed out that the Europeans believed that there was a place of immense wealth that was referred to as El Dorado due to the presence of gold in the place. As a result, many people made efforts to search for the place to get the gold. However, it has never been confirmed whether this place exists or not. In addition, during the Egyptian civilization period, the people used to bury great amounts of gold together with dead pharaohs in belief that they would use the gold in the afterlife. Just like the ancient civilizations, many countries are now interested in increasing their gold reserves as protection in case of a financial crisis. As a result, the countries make efforts to improve the returns of the official gold reserves. The modern world monetary system is founded on gold that has been held by the Central Banks and in the Treasury. Gold is considered to be equal to money due to its importance in the Gold Standard . The three gold standards that are used in the monetary system include the gold specific standard, the gold exchanged standard and the gold bullion standard . A Gold Standard ensures that the public can prevent governments from pursuing destabilizing monetary policies through escape Asset and Debt deflation or Fiscal profligacy. The holdings of gold at the market price by the World Central Bank constitute part of the World International Monetary Reserves(IMRs) upon which the World monetary system is based. Measurement of changes in IMR defines whether there is expansion or contraction of the World Central Bank Monetary Base. In 1944 at the time of the Bretton Woods agreement, gold accounted for about 90 per cent of the consolidated World Central Bank Monetary Reserve and because the United States owned about 90 per cent of the Central Bank gold, the dollar managed to become the International monetary system key currency. Gold has real money value because its value is not affected by changes in the economy or control by the government economic policies. Ancient civilizations recognized the importance of gold hence they had many prisoners of war work in gold mines in search for the gold. In 4000 BC, Eastern Europe began using gold to make fashion and decorative objects and by 1200 BC, Egyptians were beating gold to extend its use in the society. They even combined it with the other metals to create alloys and also use it for the lox-wax technique. In 550 Scathe Greeks mined gold in the Middle East and the Mediterranean and used it foe art and in the monetary system. In 344 BC, Alexander the Great is believed to have crossed the Hellespont carrying vast quantities of gold he had acquired from the Persian Empire. According to the Greek mythology, in 1550 BC, the King of Mycenae who led the Greek expedition to Troy had worn a gold funerary mask. The Romans also mined and used gold which they sometimes sought in the water streams . By 50 BC, the Romans were able to issue a gold coin known as Aureas. The value of gold in the society remained over the years and in 1299AD, Marco Polo wrote about gold that he had seen in his travels to the Far East. In 1903AD, the Gold Standard Act in the US was officially established and enabled the US to maintain a fixed exchange rate as compared to other nations. This ancient history of gold confirms how important gold has been to the society for many centuries as a monetary value and for other applications. Investment in gold Investment in gold is very vital in economic growth and stabilization of the economy . Research studies that have been carried out in the economic confirm that the economy and the wider society interact . Gold is considered to have great value as compared to other precious metals that are mined and used in the society. The significance of gold in relation to the world monetary system makes investment in gold an excellent long-term means of saving and protecting wealth from negative economic forces. Initially, gold coins were used as money when paper money had not been introduced in the economy. However, the introduction of paper money made the carrying of bank notes that were more divisible and lighter than the heavy gold coins more convenient. This case was witnessed in the US during the 1930s Great Depression when President Roosevelt advocated against the use of gold. Gold is also very important when there are negative or low real interest rates. This is because the demand for gold is increased when real estate equity and return on bonds are not adequate to compensate for risk and inflation. For instance, during the 1970s when economic changes resulted from stagflation that led to an economic bubble. In cases where national crisis is experienced as a result of looting, invasion, war or crisis, many investors are concerned about the seizing of the assets and the reduction in currency worth. In efforts to maintain the currency worth, the investors therefore consider gold to be a solid asset and a good form of investment. Investors have taken advantage of the relation between gold and money by investing in various ways. Many investors in gold as well as the economists agree that gold has become the world’s ultimate dollar hedge investment. Investors can invest in gold is various ways . For example, investment in gold can be done through direct ownership, Gold Exchange-Traded Funds(ETFs),gold mutual funds, junior gold stocks and gold options. In direct ownership form of investment, the gold bullion is very important hence the investors who choose to invest in gold through direct ownership enjoy permanent high value of gold. The Gold-Exchange Traded Funds (ETFs) refer to the mutual fund that trade on stock like ordinary stock. In the United States, the two gold ETFs that trade hold onto the gold bullion. On the other hand, the gold mutual funds allow investors to invest where the funds hold portfolios of gold stocks of companies that mine gold while the junior gold stocks are preferred by the investors whose risk of tolerance is broader. The investors hence accept the possibility of gold-based losses. The gold options form of investment is used by the experienced and the sophisticated investors due to the element of speculation in gold prices. Investment in gold can also be done through the purchase of bullion gold bars. In many countries, the billion gold bars are usually sold over the counter in the countries’ major banks. In addition, the gold bullion dealers provide investors with an opportunity to purchase the bars which differ in sizes. As difficulties in storing, verifying and storing pure gold increase, investors now find it easy to invest in gold though a gold account. Because gold bars are easier to store, they are often sold as kilo bars. Investment in gold is also done by buying gold coins and this enables one to hold the monetary value through gold. Examples of banks that sell and buy gold counts over the counter include the Liechtenstein and Swiss banks. The American Eagle billion coin is the most popular gold coin that has been used for hundreds of years. These coins have a stated amount of pure gold made from the denominations that are provided by the treasury. The Gold exchanged traded funds are sold or bought as shares on the major stock exchanges in Sydney, New York and London. For those who investors in gold through the gold billion, a certificate of ownership is held. These certificates enable various investors to sell or buy security without the inconvenience that may be associated with actual physical gold transfer. Gold certificates were first issued to customers in England and Netherlands in the seventeen century in order to allow the investors/ customers to keep the gold bullion safe through the certificates.