The Worlds' Most Fundamental Currency?
What Is Gold?
Gold is a chemical element with the symbol Au (from Latin: aurum) and atomic number 79, making it one of the higher atomic number elements that occur naturally. In a pure form, it is a bright, slightly reddish yellow, dense, soft, malleable, and ductile metal. A relatively rare element, gold is a precious metal that has been used for coinage, jewelry, and other arts throughout recorded history. In the past a gold standard was often implemented as a monetary policy, but gold coins ceased to be minted as a circulating currency in the 1930s (at least in the U.S.), and the world gold standard was abandoned for a fiat currency system after 1971.
Gold is a precious metal that has been used for coinage, jewelry, and other arts throughout recorded history.
How Does Gold Serve as an Investment and Currency?
According to the Federal Reserve Bank of Saint Louis "The characteristics of money are durability, portability, divisibility, uniformity, limited supply, and acceptability."
Gold is both a commodity and a currency. It is used as a medium of exchange, store of value, and unit of account. Gold has all the characteristics of money, which are; durability, portability, divisibility, uniformity, limited supply, and acceptability.
Gold has been used as money since ancient times due to its unique properties that make it ideal for this purpose:
Rarity (Limited Supply)
Gold is found in only small amounts in the earth's crust so it cannot be reproduced by man. This makes gold scarce and gives it value.
Gold does not tarnish or corrode like other metals such as silver or copper do over time making it ideal for storing wealth over long periods of time.
Gold can be easily melted down into tiny pieces and transported without losing much value compared to other precious metals like silver or platinum which have higher melting points than gold does making them less practical for transport by merchants due to their density (weight) compared to gold's much lower density (weight).
Gold has all the characteristics of money, which are; durability, portability, divisibility, uniformity, limited supply, and acceptability.
Factors That Influence Gold's Price
Gold has been used as money for thousands of years. It is a commodity that has intrinsic value and is considered a safe haven during times of uncertainty.
Gold's price can be affected by many factors, including:
Inflation can affect the price of gold in a few ways. When inflation is high, the value of money decreases, which can lead to an increase in the price of gold. This is because gold is often considered a safe-haven investment and a hedge against inflation. When the value of money decreases, investors may turn to gold as a store of value that is not subject to the same inflationary pressures.
Interest rates and gold prices have an inverse relationship, meaning that when interest rates rise, gold prices tend to fall, and when interest rates fall, gold prices tend to rise.
When gold production is high, the supply of gold increases, which can lead to a decrease in the price of gold. This is because an increase in supply can lead to an excess of gold on the market, which can lead to lower prices.
When jewelry production goes up, it increases demand for gold and drives up prices.
Central Bank Reserves
Central banks hold gold reserves because they believe it protects against inflation, economic instability and geopolitical uncertainty. As central bank increase their holding, gold supply decreases, which in theory, should increase the price of gold.
Reasons to Invest in Gold
There are several reasons why people may choose to invest in gold:
Hedge Against Inflation
Gold is considered a hedge against inflation because its value tends to increase as the cost of living goes up. This is because gold is a finite resource, and as demand for it increases, so does its price.
Investing in gold can help diversify an investment portfolio, as its performance is often uncorrelated with other assets such as stocks and bonds.
Store of Value
Gold has been used as a store of value for thousands of years and is often considered a "safe haven" asset. This makes it a popular choice for investors looking to protect their wealth.
Gold is a highly liquid asset, meaning it can be easily bought and sold on the open market.
Gold as a Currency
Gold is a form of money and it can be used as a medium of exchange or store of value. Central banks around the world hold gold in their reserves.
Gold is also used in jewelry, which is a significant factor in gold's value, as demand for jewelry can change the price of gold.
It's important to note that gold, like other investments, can fluctuate in value and there are no guarantees of its future performance. One should also consider one's investment horizon, risk appetite, and investment goals before investing in gold.
Famous Investors on Gold
Warren Buffet on Gold
"It doesn't do anything but sit there and look at you."
“Commodities such as gold and silver have a world market that transcends national borders, politics, religions, and race. A person may not like someone else’s religion, but he’ll accept his gold”
Frequently Asked Questions (FAQs)
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Q: Does Gold Tarnish?
A: Yes, Gold Is Resistant to Tarnish and Corrosion, But Not Immune
Gold is a relatively inert metal, which means that it does not react easily with other elements. As a result, it is resistant to tarnish and corrosion. However, gold can still be affected by certain chemicals and environmental factors.
Gold can tarnish when exposed to air and humidity. The tarnish is caused by a thin film of gold oxide that forms on the surface of the metal. This film can be removed by cleaning the gold with mild soap and water, or with a specialized gold cleaning solution.
Sulfur compounds, which are present in the air, can also cause gold to tarnish. Jewelry that is worn frequently is more likely to tarnish than jewelry that is stored in a safe or a jewelry box.
To prevent gold from tarnishing, it's recommended to store it in a cool and dry place, away from other jewelry that might contain other metals that could cause a reaction with gold and also avoid exposing gold to chemicals such as chlorine or bleach.
Q: Is Gold a Safe Haven?
Gold is often considered a safe haven asset, which means it is a type of investment that is expected to maintain or increase its value during times of economic or political turmoil. This is because gold has a long history of being a store of value and is not directly affected by the performance of the stock market or the economy. It is also a physical asset, which gives it an added layer of security. However, like any investment, the value of gold can fluctuate and there is no guarantee of its future performance.
End of Lesson
Gold is a precious metal that has been used as a store of value for thousands of years. It is considered a "safe haven" asset, which means it is expected to maintain or increase its value during times of economic or political turmoil. Gold is often used as a hedge against inflation, as its value tends to increase as the cost of living goes up. It is also a popular choice for investors looking to diversify their portfolios, as its performance is often uncorrelated with other assets such as stocks and bonds. Gold is a highly liquid asset and can be easily bought and sold on the open market. It is also widely used in jewelry, which is a significant factor in gold's value, as demand for jewelry can change the price of gold. Central banks around the world hold gold in their reserves. However, it's important to note that gold, like other investments, can fluctuate in value and there are no guarantees of its future performance.