Gold has been widely used throughout the world as money, for efficient indirect exchange (versus barter), and to store wealth in hoards. For exchange purposes, mints produce standardized gold bullion coins, bars and other units of fixed weight and purity.
The ancient Egyptians were the first to smelt gold around 3600 B.C. A thousand years later, gold jewelry emerged as the goldsmiths of ancient Mesopotamia crafted a burial headdress made of lapis, carnelian beads and leaf-shaped gold pendants. Since these early days, mankind has been captivated by gold, and the desire to own it has led to great gold rushes and wars. In 1511, King Ferdinand of Spain declared, Get gold, humanely if you can, but at all hazards, get gold! Today, gold is sought after for investment purposes and a strong jewelry market and is also used in the manufacturing of numerous electronic and medical devices.
A total of 186,700 tonnes of gold exists above ground, as of 2015. The consumption of gold produced in the world is about 50% in jewelry, 40% in investments, and 10% in industry.
Central banks continue to keep a portion of their liquid reserves as gold in some form, and metals exchanges such as the London Bullion Market Association still clear transactions denominated in gold, including future delivery contracts.
Today, gold mining output is declining. With the sharp growth of economies in the 20th century, and increasing foreign exchange, the world’s gold reserves and their trading market have become a small fraction of all markets and fixed exchange rates of currencies to gold have been replaced by floating prices for gold and gold future contract. Though the gold stock grows by only 1 or 2% per year, very little metal is irretrievably consumed. Inventory above ground would satisfy many decades of industrial and even artisan uses at current prices.
The bullion market is just one of several ways to invest in gold and silver. Other options include exchange-traded funds, futures, options and mutual funds; these can be more appealing to investors, because they offer greater flexibility. Bullion offers less trading flexibility than other gold and silver investments, because it is a tangible object that comes in bars and coins of established sizes, which can be difficult to buy or sell in specific amounts. Bullion is also expensive to store and insure.
An investor who wants to purchase precious metals can purchase it in physical bullion form or paper form. Gold or silver bars or coins can be purchased from a reputable dealer and kept in a safe deposit box at home, in a bank, or with a third-party depository. Also, you can purchase bullion in an allocated account at a bank which holds the bullion for the client. The client has full legal ownership of the gold. If the bank faces bankruptcy, its creditors have no claim to the bullion in the allocated account since it belongs to the client or owner, and not to the bank.
The gold standard developed a nebulous definition over time, but is generally used to describe any commodity-based monetary regime that does not rely on un-backed fiat money, or money that is only valuable because the government forces people to use it. Beyond that, however, there are major differences.
Some gold standards rely only on the actual circulation of physical gold coins and bars, or bullion, but others allow other commodity or paper currencies. Recent historical systems only granted the ability to convert the national currency into gold, thereby limiting the inflationary and deflationary ability of banks or governments.
Twice a day, The London Gold Market Fixing Ltd. sets the price of gold based on the basic economic principles of supply and demand. The world then uses these prices to determine the price of bullion and gold-related products.
Gold certificates are physical documents resembling a paper bank note that entitles the holder to a specified value of gold. Because gold bullion is difficult to transfer and store, gold certificates facilitated the ownership and use of gold when it was legal currency. Gold certificates were in general circulation in the United States and used as money from 1882 to 1933.
The United States government under President Franklin D. Roosevelt made gold certificates, as well as the possession of gold in any other form except jewelry, illegal in 1933 when the U.S. went off the gold standard. About 30 years later, gold certificates became legal again, and they have been prized by collectors ever since, but they are not legal tender. The highest denomination of gold certificate ever issued was for $100,000, but it was only used as an accounting tool within the Federal Reserve. One such note belongs to the Smithsonian collection at the National Museum of American History.
A gold bug is an individual who is bullish on gold. Gold bugs believe that gold is still a stable source of wealth, like it was during the years of the gold standard international currency system. A gold bug invests in gold for what he or she perceives as financial security in the event of a currency devaluation, and often also believes that the price of gold will continue to rise in the future.
The term also refers to analysts who consistently recommend gold buys.
Gold bugs view gold as a safe investment that will protect them from currency fluctuations or downturns in the financial markets. Although gold is widely known as a standard of value, its price – like that of any other precious metal or commodity – fluctuates widely. For example, the price of gold declined from more than $800 per ounce in the 1980s to less than $350 per ounce in the 1990s. This is a point frequently brought up by critics, who view gold as a standard of wealth from the past.
While there is no consensus, the market does continue to view gold as the traditional safe harbor during times of economic crisis. For example, following September 11, 2001, gold prices saw sharp increases as investors sold what they believed were riskier assets.
Reverse Gold ETF
Exchange traded funds that are designed to trade in a direction that is diametrically opposite to gold bullion. Reverse gold ETFs, or inverse gold ETFs as they are better known, are generally used by investors to hedge against a downward move in gold prices, or by speculators to execute a bearish trade in gold. They typically deliver the inverse of the daily return of physical gold; leveraged inverse gold ETFs deliver a multiple (2x or 3x) of the daily inverse return of gold.
Inverse gold ETFs enable retail investors to take a bearish view on gold with limited amount of capital. For example, an investor who wishes to hedge $5,000 of gold exposure can buy an inverse gold ETF. Assume the ETF units are trading at $10, so the investor buys 500 ETF units. If the price of gold falls by 4% the next day, the ETF units should trade 4% higher, or around $10.40. The increase in the value of the inverse ETF units thus offsets the decline in the investor’s gold stocks portfolio.
Since their performance depends on the daily return of gold, inverse gold ETFs – like all such ETFs – may underperform during periods of heightened volatility in gold prices.
If you are looking for a hedge against inflation, a speculative play, an alternative investment class or a commercial hedge, gold and silver futures contracts might fit the bill. Be forewarned: Trading in this market involves substantial risk, and investors could lose more than they originally invested.
Summary / Latest Gold News (as of this article date)
Gold prices are trading about 11% higher this year, which is shy of the S&P 500’s 15% gains. Note that as the dollar strengthens, gold loses momentum. Nevertheless, with the rise in geopolitical tensions and equity valuations, gold has become a popular asset class among many investors. That said, traders should maintain a neutral to bullish outlook on gold moving forward. Check current gold price here.
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