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‘Safe haven’ gold has a rich 3,000-year history

Gold struck a record high of $1,944.71 in Asian trading on Monday as traders piled into the “safe haven” investment, a status that is a product of the characteristics that have long made the metal useful in finance.

The Egyptians were the first to mine gold somewhere around 3000 BC. The fairly balanced distribution of gold across the planet meant numerous civilisations used the metal in their societies.

If the metal was first used for its aesthetic qualities, from 700 BC it began to be used as money along with silver.

Being rare, relatively easy to extract and work, as well as rustproof, gold was well suited for use as a medium of exchange.

It maintained a central role in monetary systems for centuries.

It was only less than 50 years ago that gold lost its role underpinning the international monetary system. It was in 1971 that US President Richard Nixon abandoned the convertibility of the US dollar to gold which had underpinned the post-World War II international monetary system.

If gold has lost that monetary role, that doesn’t mean it has lost a role as a means of storing value, particularly when other investments could be hit by recession or inflation.

Carlo Alberto De Casa, an analyst at ActivTrades and an author of a book about the precious metal, said one advantage of gold is that “a lot of value can be stored in a small environment” due to rarity and price.

Production of gold has remained relatively stable over time compared with other raw materials. Take for example oil, where the OPEC oil cartel has used its ability to turn on and off the taps to support prices for decades.

Between 2018 and 2019, gold production inched up around one percent, and only thanks to recycling did supply increase by a total of three percent.

Another important feature is that “gold, in contrast to the greenback and other currencies, cannot be printed,” De Casa told AFP.

While central banks like the US Federal Reserve and the European Central Bank have not printed cash, they have done virtually the same thing by creating electronic money to buy assets such as government and corporate bonds.

Over the past years, they have injected vast amounts of money into their economies in this manner to support growth.

This flood of liquidity tends to lower the value of currencies, and the fact that interest to be earned on government bonds has fallen as central banks snap them up tends to sap demand from foreign investors.

Gold, in contrast to bonds, does not offer interest. And there are no dividends for investors, unlike when they place their money in stocks.

So, during good times, the investment argument for gold may not glitter.

But it is during times of crisis that it shines — its value is completely disconnected from the real economy.

The value of stocks may fall during recessions as the prospects for profits fall, and investors could lose everything if they hold onto shares in companies that go bankrupt.

Inflation eats away at the value of bonds.

Investors thus seek gold out as a “safe haven” during times of economic crisis or volatility.

While other precious metals such as silver and palladium also enjoy something of safe haven status, their use in industrial products means that during recessions their price tends to slide as demand from manufacturers slides.

Analysts said fears about the future were driving the current rally in gold.

Swissquote Bank’s Ipek Ozkardeskaya said “capital continued pouring into the precious metal on the back of an uncertain appetite for risk and waning trust regarding the strength and the viability of gains in global equities.”

While gold is appreciated by many investors, it does have its detractors.

Prominent among them is legendary investor Warren Buffett, the “Sage of Omaha”, whose investment decisions are closely followed by many.

He most famously expounded on the metal in a 1998 speech when he said gold “gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again, and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

Much before that economist John Maynard Keynes derided the gold standard as “a barbarous relic”.

While gold may provide a safe haven of sorts, that safety is relative.

Investments by speculators can increase short-term volatility and over the long term, a recovery in global growth will see investors sell off and the price fall.-AFP

Kevin Trublet, "‘Safe haven’ gold has a rich 3,000-year history," Business recorder. 2020-07-29.
Keywords: Economics , Central bank , Monetary system , Economic crisis , Carlo Alberto De Casa , Richard Nixon , 2014

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