Gold is used to diversify risk in portfolios. It produces no income but global investors will head for safe havens such as the US Dollar and gold when there is significant uncertainty to make investors nervous. It earns no interest but investors will buy it for stability when the value of other assets is falling or is not adequately compensating for risk. So in a crisis or when inflation is undermining the value of investments portfolio managers will buy gold as a hedge. This puts pressure on the price, and the ensuing increase in value of the investment, at least partly, offsets the losses elsewhere in the portfolio.
It has a major role in the thinking and financial planning of all global financial authorities so that in 1999 the Washington Agreement On Gold between Europe, The United States, Japan, Australia, Bank for International Settlements and the IMF agreed to limit gold sales to 500 tonnes per annum for 10 years. That has been extended beyond 2009 for a further five years to sales of no more than 400 tonnes. During that first period the Bank of England and Swiss National Bank were keen sellers something they may have regretted during the financial crisis when gold rose rapidly in value. 75% of all the gold produced has been mined since 1910. It is, generally, stored as gold ingots with one ingot weighing 400 troy ounces which is about 12.4 kilograms.
Gold has many uses in electronics, dentistry, medicine, radiation shielding and, of course, jewellery. It is a highly malleable metal and extremely ductile so that one ounce of gold can be stretched into a gold thread 8 kilometres long. It can even be used as embroidery thread. An ounce of gold can also be beaten into a sheet that is 300 square feet large and can be made so thin that it is transparent. It is odourless and tasteless, is non-toxic and can be digested as metal flakes in food or drink without ill effects.
The purity of gold is measured in karats and pure gold is 24 karats. It is, however, very soft and can wear away very easily so in less pure forms it may contain a variety of other metals such as silver, copper and platinum in order to make it cheaper or tougher or to meet other criteria. Very few chemicals can attack gold so that it can be buried for many years without deteriorating.
Gold was first used as money in 643 BC. The first time it was valued was by Emperor Augustus in ancient Rome when the price of a pound of gold was set as being worth 45 coins.
The price of gold is determined twice each day on the London bullion exchange by five members of the London Gold Market Fixing Ltd via a telephone conference facility. Originally this took place in the offices of N M Rothschild & Sons just once a day at 10.30am, however in 1968 a second time of 3pm was established in order to coincide with trading in the US. The price is set in US dollars, Sterling and the Euro.
The first modern day gold price was set in 1919 at a price of US$19.39 per ounce or four pounds 18 shillings and 9 pence per troy ounce.
In 1933 the President of America at that time, Franklin D Roosevelt ordered US citizens to hand their gold over to the government for $20.67 per ounce and the price was promptly raised to $35.00 per ounce.
During the 2nd world war the fixing of the gold price was suspended in 1939 and not resumed until 1954. In 1946 The Bretton Woods System was enacted whereby the 44 countries that joined were joining a system of fixed exchange rates that allowed the participating countries to sell their gold to the United States Treasury for $35 per ounce. The purpose of the agreement was to speed up post war reconstruction and to bring order to international finance. As part of the agreement the IMF was formed as was the bank for international reconstruction and development. The agreement was ended on 15th August 1971 when President Nixon ceased trading of gold at a fixed price. This stopped the era of exchange rates being fixed but the other institutions remain and have an important role in global finance.
There is still plenty of gold in the ground to be mined but its status as a store of value plus its other relatively unique properties and attractions as a thing of beauty mean that the price of gold is more determined by the level of demand that there is for it.
Industrial demand is fairly stable and alternatives can be found for some of its uses. India represents the market most watched to judge the potential for demand for jewellery and for retail demand generally. Diwali is the time in the Indian calendar when wealth is celebrated. This falls between October and November. Gold is a store of value in India and is a symbol of wealth and status especially among the rural population where practical considerations of portability and security help to explain the huge demand there in spite of the rise in the price of the metal.
Demand for gold from investors, however, is probably the main influence on the price as it is a recognised form of investment diversification. Hedge funds and portfolio managers use it for this purpose and the introduction of Exchange traded funds (ETFs) some of which require the physical commodity to be held and which is highly accessible to the retail investor has led to the potential for massive increase in demand at a time of financial crisis.
Demand for gold rose sharply following the collapse of Lehman Bank and was a symbol of the low levels of confidence in the market over the years until 2011 when the price peaked. Slowly confidence has returned and the price of gold has fallen. Incidents such as the Russian annexation of Crimea and the uprising in Iraq will have temporary but low level influence on the price provided the incidents do not escalate out of control. Many investors see gold as an essential part of their portfolio as a counter balance to other assets in a highly volatile and uncertain world.
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