A Historical View of the Price of Gold

The total amount of available gold in the world today is about 156,000 tons. Each year only 2,500 tons are mined from which the 2,000 tons are absorbed by the jewelry industry and the rest 500 tons are used as investment gold. As gold production is controlled and concentrated in a few countries -increased demand is often not satisfied by supply. Historically, gold was used as the world’s currency, and during periods of financial turmoil gold is considered by many investors as a “Safe Heaven”. During these periods the price of gold is making excessive upward movements without intermediate corrections. Investors’ psychology plays a huge role in gold price movements. Market psychology beats the laws of demand and supply. In 2009 (in the middle of the financial crisis) market demand for gold fell 32% while gold prices significantly increased.

J.P. Morgan said in 1912: "Gold is money, everything else is credit"

 

Precious Metals versus Industrial Metals

There are two main categories of metals, industrial metals, and precious metals. A key difference between these two categories is that precious metals do not react with oxygen while industrial metals do react with oxygen.

• The three major precious metals include gold, silver, and platinum
• The four major industrial metals include copper, aluminum, zinc, and lead

The price of industrial metals reflects the overall state of the world’s economy. The stronger the economy the higher the investment for building new houses and offices. The higher the expenditure for housing and infrastructure the higher the demand and prices of industrial metals.

Traders of industrial metals may use a simple technique to evaluate the real supply and demand for a particular industrial metal. The two major metal exchanges (COMEX/CME and LSE) offer information about warehouse supplies.

Therefore by examining the available stock:

(i) If the stock levels are higher then the demand is lower or the production is higher

(ii) If the stock levels are lower then the demand is higher or the production is lower

But as concerns precious metals this is not always the deal. Precious metals tend to trade within longer market cycles that usually last a decade. The precious metals are used as investment assets (35%) and as raw materials for jewelry (45%). The price of precious metals tends to peak during a financial or political crisis, wars, etc. Gold is seen by investors as a ‘safe-haven’ during an economic crisis.

 

Looking at the historical fluctuations of the Gold Price

The chart below presents the price of gold (New York Market) between 1960 and 2011. The black line represents the daily closing while the dotted line represents the 10-year moving average price.

Chart: The price of gold over the past 50 years

Note: The black line represents the daily closing and the dotted line represents the 10-year moving average

The current gold price rally shows similarities with the rally of the 70s.

Gold Rally during the 70s

In 1971, the Bretton Woods system was officially ended. By that time, the price of gold was traded for only $41 / Ounce while ten years later, in 1980, the price of gold exceeded $600 / Ounce. The gold price rally of the 70s can be also attributed to the inflationary concerns created by the oil crisis during that particular period.

 

 

Agreements and key systems to control the price of gold until 1971

• GOLD STANDARD RULE

In 1871 the Gold Standard Rule was implemented in all industrialized countries. Due to the gold standard rule, money circulating in these countries should match the corresponding value of the gold they owned. According to this principle, no state could issue new money without the corresponding gold reserves. Gold standard rule controlled the global economy and historically restrained inflation. The role of the Gold Standard Rule started to fade at the end of World War II. Germany was forced to pay huge war reparations and simply didn’t hold enough gold to apply the Golden Rule. So Germany was forced to withdraw its local rate from this global system. By that time it was realized that the world monetary system could function without the existence of the Golden Rule. The gold standard rule was formally ended in 1933 when a conference in London proposed a new monetary system that was later established as the Bretton Woods System. In 2009, Russia proposed the return of the Golden Rule to the global monetary system, but it is considered highly unlikely and even impossible to be realized.

• BRETTON WOODS FIXED RATE SYSTEM

The Bretton Woods Fixed Rate System applied a stable exchange rate between the currencies of 44 allied countries that won World War II. This fixed-rate system placed the US Dollar at the center of the global monetary system –the US Dollar was linked to the price of gold at a fixed ratio of $US 35 per ounce of gold. Bretton Woods System was officially abandoned in 1971.

• WASHINGTON AGREEMENT ON GOLD (WAG)

In 1999 the Washington Agreement on Gold (WAG) was signed. According to the WAG, central banks of all signatory countries and organizations (Countries of Europe, the US, Australia, IMF, and BIS) may not sell more than 500 tons of gold annually. Since 2004, the limit moved lower to 400 tons of gold annually.

 

Gold prices during the period 1257-1945 (British Official Price)

For hundreds of years, the price of gold was characterized by stability. Thanks to the excellent records of the United Kingdom we can trace with accuracy the price of gold (from year to year) from 1257 until 1945 when the Official UK Price ended (British Official Price). The chart below shows the price fluctuations of the precious metal in British Pound/Ounce. Note that in 1791, gold started to trade also in the New York Market.

Chart: The Price of Gold during the period 1257-1944


Observing market data from all of the above tables concludes that the gold market was for hundreds of years a place of stability. Still, since 1970 the gold market entered a phase of strong fluctuations that are continuing nowadays.

 

The Key Features of Gold as a Precious Metal

(i) Gold has unique characteristics

• Gold durability over time is extraordinary as it doesn't corrode
• Gold may conduct heat and electricity better than copper

These two characteristics make gold an ideal metal for electronic applications (mobiles, microprocessors, etc.)

(ii) Gold as a Hedging Tool against Inflation

Gold acts historically as a hedging instrument against inflation. As the US dollar falls in value due to inflation, gold which is priced in US Dollars gains value respectively. The historical price of gold helps economists to calculate past values in today’s prices.

(iii) High Demand for Gold from Jewellery

Jewelry as an industry is the traditional buyer of Gold, while the Demand for Jewellery accounts for 45% of the aggregate demand for gold each year.

(iv) Gold is highly used as a Reserve Currency

Every Central Bank in the world uses Gold as a reserve currency. Moreover, commercial banks, investment firms, and many individual investors include gold assets in their portfolios. The existence of Gold in a portfolio enhances portfolio diversification and reduces risk.

 

Aggregate Demand for Gold

• Jewelry (45.00%) -China and India account for 50% of the total demand for Jewellery Gold
• Investment Gold (35.00%) -The demand for investment gold counts more than 1/3 of the total demand for gold
• Central Bank Reserves (10.00%) -Central banks traditionally use Gold as a Reserve Currency
• Industrial Applications (7.00%) -This category of demand includes mainly applications in the electronics industry, but also fuel cells and the space industry
• Other Demand (3.00%) -This includes demand from other sources, for example, gold for dental applications, etc.

 

Countries with the highest Gold Reserves

According to the World Gold Council, the largest gold reserves in the world are presented. Blue bars represent the highest per-capital reserves. Switzerland is found at the top, followed by Lebanon and Germany. As concerns the countries' total reserves, the U.S. is on the top holding 8,134 tons of gold, followed by Germany holding 3,401 tons of gold.

Chart: Highest Gold Reserves per capita

Source: World Gold Council

 

 

◘ Compare Gold Trading

This is a basic comparison of some brokers offering Gold through CFDs.

Table: Compare Gold Trading

BROKER
□ PRECIOUS METALS AVAILABLE	XAUUSD Avg. spread (pips) 1.90 Commission 10 / mio Swap short (pips) -3 Swap long (pips) -29 XAGUSD ETFs 20 ETFs on platinum, palladium, copper or nickel	GOLD PAIRS XAUUSD XAUEUR XAUGBP XAUJPY XAUAUD XAUCHF	Gold (XAU) Silver (XAG) Platinum (XPT) Palladium (XPD)	Gold (USD and EUR terms) Silver (USD and EUR terms) Platinum and Palladium
□ CONTRACT INFO	Size of 1 lot 100 oz. Hedged margin 50% Min. contract size (lot) 0.01	Contract size: 100 Minimum Volume: 0.01	Up to 1000:1 leverage Micro lots starting with 0.01 Available directly on MT4 and MT5 platforms	Trade precious metals against USD and Euro
□ PLATFORMS	MT4/MT5 RStocks Trader	MT4/MT5 Ctrader	MT4/MT5	MT4/MT5
□ TRADING ACCOUNTS	Min. Deposit: 200 USD Funding Methods: Cards | Bank Wire | Skrill PerfectMoney | Neteller » Review RoboForex	Min. Deposit: 200 USD Funding Methods: Credit Cards | Bank Wire Skrill | PayPal | Neteller » Review IC Trading	Min. Deposit: 200 USD Funding Methods: Credit Cards | Bank Wire Skrill | UnionPay | Neteller » TitanFx Review	Min. Deposit: 100 USD Funding Methods: Credit Cards | Bank Wire UnionPay | Neteller » Review FXDD
□ MORE INFORMATION	» RoboForex Website	» IC Trading Website	» TitanFx Accounts	» FXDD Accounts

   

■ A Historical View of the Price of Gold

G.P. for TradingCenter.org (c)

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