Price of Gold – Overview

gold price chartSince time immemorial the price of gold has continued to be stable because man has always recognised its worth.

Thousands of years ago gold was a rare commodity and it still is today. The people of ancient times, having realized the worth and rarity of gold, used it as a mode of currency as well as for ornamentation purposes.

For centuries gold has been an integral part of economies and money systems. In fact the economies of many nations were historically determined on the basis of their gold stock. The result has been that gold prices have always trended upwards.

In today’s turbulent global economy investing in this precious metal is becoming an increasingly important and popular component in maintaining a healthy and profitable investment portfolio.

Going Back In History

Let’s find out how gold was used by man as a form of currency. For this we have to go back to the times of the ancient Egyptians and Sumerians. It was they who first understood the value of gold along with other precious metals.

They began to use gold for ornamentation. Later they started to make gold coins. Before the advent of gold coins the exchange of goods and services were based on the barter system. The introduction of gold coins brought about a new scenario. People began to use it as a form of currency to buy goods and services. As a result the price of gold began its ascendancy.

As time passed, in addition to gold coins world economies introduced a new form of currency – paper money. This development did not undermine the value of gold however and the price for gold remained unaffected.

Until the 20th century there existed a ‘gold standard’ which is defined as ‘a monetary system in which the standard economic unit of account is a fixed mass of gold’. During those times the price of gold was more or less fixed and as such was conductive for fair trade.

It didn’t fluctuate much because paper money could be easily converted into gold or other precious metals. Even if it did fluctuate it was only marginal (just a few cents) with the purpose being to meet expenses like shipping and insurance.

The First World War had a deep impact on money convertibility. Since many leading countries of the world were involved, it became increasingly difficult to transfer wealth.

It also affected the exchange rate that was previously fixed worldwide. Political alliances and varying foreign exchange rates affected the stability of gold bullion and as a result the price of gold began to fluctuate.

The beginning of the 20th century brought with it many changes. It left behind the old standard of backing paper money with gold or other precious metals. Countries like the U.S. and UK abandoned gold and instead pursued a policy of increasing the production of paper currency.

This ushered in a new era of gold investing and the market was opened up to accommodate it.

The 1940s witnessed a surge in the mining industry and during that time production almost doubled. At that time the gold price was $35 an ounce. Thereafter the price began to climb steadily. People realized the advantages of investing in gold. Moreover, since in terms of worth gold had an inherent stability more and more investors began to invest in this precious metal.

1971 – A Major Turning Point For The Price of Gold

Since the 20th century there has been a surge in gold investing and as a result the price of gold has maintained an upward trend. Gold as a strong investment vehicle increased dramatically post 1971 when the global economy completely discarded gold as an anchor for paper money. This was due to President Nixon ending the Bretton Woods exchange and removing the gold standard from the US dollar.

This resulted in gold prices hitting a then record high of $850 an ounce in 1980. Of course certain world events like the Soviet invasion of Afghanistan and the Islamic Revolution in Iran which created global tensions were to some extent responsible for this as well.

Investors scurrying to lower their holdings risk and also to ensure safe investments began to invest in gold because they recognized its inherent stability and underlying worth. The returns they got belied their expectations.

Although the gold price witnessed a meteoric rise to $850 an ounce it did gradually fall back but still remained high in comparison to the level before its rise. Over time investors began to see gold as a form of safe and profitable investment and not just a safe haven in times of crisis. Gold became an attractive and effective investment option to build and maintain wealth and continues to be so today.

During the economic crisis of the 80’s investors who had put their faith in gold were well rewarded and were able to ride out the storm.

Towards the later part of the 20th century the overall value of gold did hover a bit. When equities skyrocketed in the 90’s they did overshadow the steady values of gold for a while.

But then investors who had invested in gold came out as winners during 2001 and 2007 when many investment portfolios were destroyed by tough markets, recessions and bubbles.

Coming right up to the present day, gold continues to shine. It has roughly doubled in value since the economic crisis of 2008 when it started the year at around $700/oz.  This is mainly due to the negative correlation that gold has with stocks, Treasury bills, bonds and the value of the US dollar. What this means is that over time gold has always moved in the opposite direction to these other forms of investment.

The video below explains more.

Conclusion

Although gold is considered by many to be a conservative investment option its strongest point is its underlying and inherent value. Investors have witnessed its ability to generate large returns when other forms of popular investments have crashed.

Today there is an overall belief that one’s investment portfolio should include gold. Many financial experts agree with this. Often what they don’t agree on though is the percentage that gold should be of your overall investment portfolio. This ranges from 10% to 30%, depending on who you talk to.

All this is underpinned by the overall belief that the price of gold will continue to rise over time and act as a wealth protection cushion during uncertain times.

If you are interested in adding gold to your investment portfolio you might find this article helpful:

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