Gold is a topic that is extensively debated today and the question most newspapers, investors and professionals ask themselves is: how high can the price of gold go?
We agree that this is an essential question, but since we always look to provide you with a different market perspective, we want to give you a more detailed insight on the fundamentals and long term drivers of the gold market. This will enable you to broaden your understanding on why investors buy gold bullion, bars or coins.
Alan Greenspan who was the Chairman of the US Federal Reserve from 1987 to 2006 said:
“You always have to ask the question why is it that central banks hold so much gold which earns them no interest and which costs them money to store?The answer is obvious: they consider it of significant value, and indeed they consider it the ultimate means of payment, one which does not require any form of endorsement.”
Over the years and in recent speeches, Alan Greenspan has supported and described the value of gold. In order to get a grip on the gold market we need to comprehend a few basic principles about gold. Gold is basically moneyand has been money for over 5,000 years. Consider the words of one of the most powerful men in the United States, Alan Greenspan, the former Chairman of the US Federal Reserve. Greenspan was initially appointed by Ronald Reagen and served successive four-year terms from 1987 to 2006. Most people don’t know this, but in the 1960s and 1970s Alan Greenspan was the biggest gold investor in the US.
Did you know that gold has been used during the course of history as money? Several European nations applied the gold standard in the later part of the 19th century until these were briefly suspended during the world financial crises during World War I.
After World War II, the Bretton Woods system secured the United States dollar to gold at a rate of US Dollar 35 per troy ounce. The system existed until 1971 when Richard Nixon the 37th President of the US on 15 August 1971 suspended the direct convertibility of the United States dollar to gold and made the transition to a fiat currency system.
The fundamental reason why people buy gold is to protect their money from losing its value. Imagine if you have $100,000 dollars in your bank account. What happens when you wake up one day and find out it has become worthless or lost all of its value? It is indeed very scary. But if you look at history this has happened many times in Germany, Zimbabwe, Argentina and many other countries.
The US Dollar is considered as the world’s reserve currency. Do you know much it has actually lost its value?
Since 1999, the US dollar (when buying gold) has fallen in value from about 123 mg of gold to less than 21 mg today a drop of more than 80% in its purchasing power.
The future of the US dollar however looks even bleaker. Recent comments from the US Federal Reserve indicate that near-zero interest rates and quantitative easing (money printing) can be expected to continue "for an extended period" or to infinity.
In 1975, the price of gold was at an average of $160. In 2012, it has an average price of $1650. That is a massive change of 931%.
The International Organization for Standardization (ISO) publishes a list of standard currency codes referred to as the ISO 4217 code list. On that list gold is classified as a CURRENCY and has a currency code of XAU.