| By Gavin Chait,
on 03 January 2008
|
 An objective measure of value ... "What is a coin compared to the value of the hand that holds it?" to misquote Terry Pratchett in his latest book, Making Money. Money, and the relative value of money, has always been of critical interest to investors. Most of the time maintaining the value of any investment has left people feeling as if they were running across an icy lake in their bedroom slippers ... during an earthquake. It is one thing to buy stocks or property in the hopes of making a fortune; but what happens when you want something that will keep its value, no matter what? For hundreds of years this third-party value was assumed to be gold. So much so that, in 1945 at Bretton Woods, the war-time allies agreed on an international gold standard to stabilise the world's economy. It was complex. Gold was fixed at $35 / ounce and all other currencies were pegged to that price via the US dollar. The US became the reserve currency of the world.
The problems for the US began immediately. In order to ensure liquidity – an availability of US dollars that other nations could use for exchange between each other – they had to run a massive deficit. And, while the currencies had to maintain their pegged rates, gold was freely traded. To ensure that continued price of $35 / ounce was extremely expensive and, ultimately, futile. The dollar became extremely overvalued while, despite their now equal importance to the world's economy, Japan and Europe found their currencies undervalued. In 1971 Richard Nixon unilaterally delinked the US dollar from gold and allowed it to float. Gold, freed from its constraints, began to run. In 1971 gold was $44/ounce, in 1972 it was $70/ounce and – by 1980 – it was $641/ounce. An interesting caveat to this story is its effect on South Africa. Without this exponential rise in the value of gold Apartheid would never have been financially viable. The total amount of gold ever mined is around 150 000 tons, with 3 000 tons mined annually. All of it is still in circulation. Each year, of the gold traded, around 70% goes into jewellery, 11% is industrial (gold fillings, electronics), and 13% is for investment (gold coins, bars). Gold just hit its highest spot price since 1980: $ 824.30 / ounce. Hence the interest. According to the World Gold Council: "Global demand for gold jewellery showed the strongest surge, reaching a record $14.5 billion, 37% higher than Q2 2006, with particular strength across the key gold markets of Greater China, India, the Middle East and Turkey." These are all nations that have experienced long periods of economic growth and their citizens are putting their money into traditional sources of value; so-called "safe havens". The collapse of the US sub-prime mortgage markets, along with the overall credit imbalance, has lead to US dollar weakness. Add to that a strengthening oil price, stock market instability, and frothiness in global property markets and it is no wonder that investors are looking to put their money into something stable. Once again they have chosen gold. Yet gold, too, is just another product. It is no different from houses, shares or bonds, and – like these investments – it is subject to the whims of investors. After reaching an all-time high of $850/ounce in 1980, gold plunged. By 1990 it was $423/ounce and, in 2000, it bottomed at $272/ounce. An important consideration for those looking for a safe-haven; as well as those worried that oil – now touching $100 / barrel – can only ever scream heaven-wards. The National Party put their faith in gold and wasted a decade of high gold values on the trauma of Apartheid. And we shouldn't, now, assume that high gold prices are with us forever either. Let's use that bonus wisely. |
