Throughout history there has never been a currency as valued and accepted as gold. Being a metal that easily forms alloys, and with a density and color that makes it difficult to emulate, gold has been the primary choice for the creation and enhancement of coins for more than 3 millennia. With unique properties such as ductility, malleability and density, it has been used to create jewelry and technology features, and the history of this metal has developed alongside that of civilization itself, becoming one of the main protagonists in the changes of mankind since it began using it.
Gold is a particularly rare mineral. Since man began exploiting it, an estimated 171,000 tons have been extracted, and despite its rarity, gold has been known throughout history by civilizations from all around the world. That is because it occurs often in free elemental, pure forms, such as nuggets or grains. Civilizations, even with simple technologies, had access to gold through alluvial deposits, with minerals being transported and deposited over hundreds of rivers around the world.
Historians estimate that man began working with gold more than 5,000 years ago, when Egyptians learned to melt it and create alloys with other metals. It was not until 564 BC, however, that Croesus, the last king of Lydia, created the first coin to be used as standard currency using this metal. The coin of Croesus had a uniform gold content, and was universally recognizable and exchanged throughout Europe. Lydia later fell into the hands of the Persian Empire, which decided to adopt gold as the main metal for their production of coins. At the same time, on another side of the world, China created its first gold coins, the ying yuan. Since then, civilizations have been born, grown and long gone in the search and conquest of land and gold.
In 1066, the British Empire created the British pound, whose value was equivalent to the weight of one pound of sterling silver (92.5% purity). From that time to the eighteenth century, its monetary system was based exclusively on gold and silver. After 1717, the ancient Royal Mint of the British Empire, led by physicist and mathematician Isaac Newton, recommended creating a fixed ratio between the prices of silver and gold. That ratio, 16 to 1, lead to the establishment of the world-famous Gold Standard, and established the foundations of the world's contemporary economy. This pattern fixed the prices of different currencies in the world to a fixed amount of gold. That meant that money could be exchanged for a specific amount of gold, and gold, in turn, could be used as any type of currency. By the end of the nineteenth century, the most influential countries in the world except for China had adopted the Gold Standard.
During the First World War, all countries except the United States were forced to suspend or abandon it. After the war, due to heavy and uncontrollable printing of money by European countries, none of these countries were able to readopt the Gold Standard System. With the world in debt, the United States became the most important lender and creditor of these countries.
The Great Depression and World War II had an effect on the value of gold. In 1944, at the end of World War II, the Bretton Woods agreement forbade ordinary people to exchange money for gold (at bank levels), but allowed the central banks to do so. This caused several governments to begin creating reserves using international currencies instead of gold, being the US Dollar the most popular. This agreement set the price of an ounce of gold at $ 35.00 USD, and based the exchange rate of other currencies to the US dollar.
Due to extremely high spending by the US government during the Vietnam War, governments around the world lost confidence in the US dollar and decided to invest in gold reserves again. Richard Nixon then decided to suspend the Bretton Woods agreement and end the exchange rate between the US dollar and gold. From that moment on, the dollar became flexible, as most world currencies, and in 1976 the definition of the dollar was changed and the word "gold” was removed forever. Since then, gold as well as most currencies in the world, became part of a free and open market.
What then is the value of gold right now? Why has its price fluctuated so much, between $200 and $1800 USD per ounce over the past 15 years? To answer these questions we must take into account two features of this precious mineral. The first is that, unlike other goods and commodities, gold isn't something that can be spent. Almost all the gold mined since ancient times is still available in one form or another. Another important detail is that the amount of gold available on the ground is much greater than the amount produced annually; therefore much of its value depends on market sentiment and not on production or annual consumption. With this in mind, the most influential factors in gold prices are:
Geopolitical factors: wars, internal conflicts and tensions between countries are crucial in the price of gold. These conflicts can shorten the supply and create speculation by governments and investors, impacting its price.
Macroeconomic factors: Gold acts as a hedge against inflation and currency devaluation. Unlike most commodities, it has a negative correlation with the world's currencies and, for the past 50 years now, as world currencies lose value, gold becomes more valuable.
Demand: The demand for gold is divided into four sub-factors:
- Technology: Due to its properties, it plays an increasingly important role in technological development. Today gold is used in medicine, nanotechnology, engineering and electronics, among others. This category accounts for 10% of the global demand for this mineral.
- Gold as Investment: Private and institutional investors use gold to reduce risks. This and other precious metals are not dependent on the economic laws of the countries or are adversely affected by inflation or deflation. In the last 10 years, gold investment has become the force that has impacted the price of this metal.
- Central Banks: For the past 30 years, a large number of central banks have been selling gold to private markets (with fixed amounts set annually). Since 2009, there has been a change in this trend and certain banks have become buyers. This is because developing countries with above average growth such as China and India have been increasing their gold reserves, which have been historically lower than those of European countries.
- Jewelry: more than 50% of the gold produced today is transformed into jewelry. Of this, 70% of such demand comes from China, India and the Middle East. This is strongly linked to its cultural and historical value, and intrinsic appeal to it.