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February 19, 2008
Gold Market
Gold Market History

Gold has played a unique role in commodities markets throughout history and has been the basis for monetary systems or has been used for coins. It is sought after for its physical properties or for its beauty and is also used as a store of wealth. Gold is seen as an alternative to the U.S. dollar and like all commodities, its price is driven by supply and demand. Investors analyze the gold market by looking at the price history in order to gain insight into the market. They do this by comparing current and historical situations, and the factors that give rise to them, in order to determine future commodity prices for gold. Successful traders perform a wide range of analyses in order to understand how and why the gold market moves. For example, history shows how the price of gold rises and falls in line with the stock prices of gold-producing companies. The price of gold also typically rises on the U.S. dollar weakness.  Gold investing requires the need for investors to keep abreast of price data and of key events affecting the market in order to invest in gold wisely.

A Look Back at the History of the Gold Market

The Sumerians of Mesopotamia first used gold as sacred, ornamental, and decorative instruments in the fifth millennium B.C. At the same time the Egyptians actually began gold refining. The Egyptians mostly used gold for the prime purpose of personal adornment and not for monetary or purposes. The very first significant private issuance of pure gold coins was under King Croesus who was the ruler of ancient Lydia in 560-546 B.C., now known as Turkey.  Skipping forward centuries, the world’s first major Central Bank (Bank of England) was established as a joint stock company. The bank was actually formed for the purpose of making a loan in the amount of 1.2 million pounds to William III, who ran up huge bills in his continental wars.  The Central Banks actually had two purposes in relation to the gold market. The first was to lend to Monarchs and the other reason central banks were established was to bail out private bankers when they were caught out in issuing more paper than they had backing in gold. The gold market initially was not necessarily seen as a mechanism for investing money, but rather as a mechanism for lending money. 

The UK adopted a gold standard after the Napoleonic war in the early 19th century. The U.S. adopted the gold standard in 1879 by making “greenbacks” that the government issued during the Civil War period. In 1914 it was apparent that the gold standard was widely accepted by many countries, although it was not yet universal. The gold market called for fixed exchange rates and provided that any paper currency could be exchanged for gold at the central bank that issued it. The underlying concept was that any deficit country would have to surrender gold to cover its deficit.  In the gold market, foreign exchange trading, under the gold standard, allowed exchange rates to fluctuate within limits determined by the costs of shipping and insuring gold. Investing in gold became a concept tweaked a lot by the UK and U.S. with the result that the volume of money of the deficit country would be reduced, leading to lower prices, while the influx of gold into the surplus country would expand the volume of that country’s money and lead to higher prices.

Interesting Fact about the Gold Market

There is gold stored at the Federal Reserve Bank of New York that is secured in a vault that rests on the bedrock of Manhattan Island. It is one of the few foundations strong enough to support the weight of the vault, its door, and the fold inside the vault. It is 80 feet below street level and in 1997 it contained about 30% of the world’s official monetary gold reserves.  At the time the gold value was eleven billion at the U.S. government price.

The gold market and the principles underlying commodity trading are interesting concepts to learn about. The gold market has played a very unique role in the formation of commodity investing throughout history and the world.

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