Gold has a long history as a currency and as part of the monetary system. The use of gold as a currency dates back to 600 BC in what is present-day Turkey. Coins were first made of electrum – which is an alloy made up of gold and silver, with trace amounts of other metals.
By 550 BC the first truly gold coin was made after a way of separating the gold from silver was developed – it is believed that the king Croesus was the first monarch to mint gold and silver coins, hence the expression ‘rich as Croesus’.
Since a country’s wealth was based on how much gold it had other countries soon followed such as Spain, Portugal, and England.
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Over time gold was stored in banks and paper certificates were issued by the bank which were backed by the gold reserves. This became the more popular form of money.
Soon central banks (starting with the Bank of England) got into the game and before long governments started to issue paper currency. The public was able to redeem the paper government currency at domestic banks for gold bullion.
However, unless there was some doubt about the government’s ability to honor its currency with gold it was not generally done.
There’s little doubt that paper currencies have many advantages, not the least is divisibility and ease of use.
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But history is rife as it runs on poorly managed banks and on currencies. Where there is suspicion that there is more currency in circulation than gold in the vault.
The Gold Standard
The Gold Standard was a period in monetary history, starting in the 19th century and ending in the early 20th century, when government-issued money was fully convertible into gold at predefined prices.
Under the Gold Standard a country’s gold supply also limited the amount of money a government could issue, because currency values would otherwise quickly fall out of equilibrium.
Problems developed during WWI and thereafter as different countries found it necessary to increase domestic money supplies at different rates and gold reserves shifted. Stresses in the system naturally developed.
The Great Depression, rising unemployment, deflation in commodity prices, and the attendant politics, encouraged Roosevelt to revalue gold to $35.00/oz in 1934.
Additionally, this allowed the Fed to reflate the US money supply, help prices recover, and employment to pick up.
It is was also outlawed for good measure the private hoarding of gold for monetary purposes; the public would no longer be able to redeem its paper dollars into gold bullion!
During WWII, the US became the single largest holder of gold in the world (war material was paid for in gold – paper currencies are risky at times of war). After WWII, at Bretton Woods, New Hampshire. As decided a new monetary system would be based on gold and a US$/gold exchange rate of $35.00.
Exchange rates would also be fixed (“floating” exchange rates got a bad name during the Depression. As it generally meant devaluation in order to gain a competitive advantage over one’s trading partners).
The US furthermore promised to exchange any US dollars held by foreign central banks (acquired as a result of exchange market intervention to maintain a currency fix) for US gold supplies, in the event the foreign central bank desired this exchange.
The over the ensuing 30 years there was a general currency devaluation against the US dollar. Moreover, central banks became increasingly nervous and took advantage of the US gold exchange guarantee.
However, the buildup of US dollar reserves continued to build abroad. The US gold stock was rundown from around 700mn ounces to under 300mn ounces by 1970.
Closing the Gold Window
Moreover, on August 15, 1971 US President Nixon imposed across-the-board tariffs and closed the gold window. Meaning that foreign central banks were no longer able to convert their US dollars into gold, thereby ending the Bretton Woods monetary system.
Since 1971 the gold price has been floating, along with most currencies. This means that the exchange rate is set by the market, versus the government intervening to prevent its currency from appreciating against another currency.
Also, if a central bank wants to decrease the value of its domestic currency. It will sell more if its domestic currency in the market and purchase the foreign currency. Furthermore, if the central bank wants to increase the value of its domestic currency it will do the opposite.
Often when we think of currencies, we think of it in both directions. For example, if the British pound appreciates against the euro, then that means the euro depreciates against the pound.
However, it is often in one direction for gold. For example: how many pounds does it take to buy an ounce of gold? Or said another way pounds/ounce, we do not often think about the inverse of this, i.e. the ounce/pound equation.
The first tab of series of charts below show gold in six different currencies, these charts will look familiar. Gold has appreciated against all these currencies since 1990 (to compare the six currencies appreciation the first chart shows all six currencies with the starting date of January 3, 1990 equal to 100).
However, the second tab uses the same method as an example above with inverse – what is the currency’s value in gold for the same six currencies. This shows how much each of the six currencies has devalued against gold since 1990!
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From the Trading Desk
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We had the FOMC meeting yesterday. All eyes were on tapering and if there would be any change.
Moreover, what we got was a possible two 25bp rate hikes in 2 years time!
Gold & silver sold off, bond yields spiked and the USD rallied.
This may be a short-lived sell-off but we are close to key support levels which we could bounce off sharply.
For those that missed the recent move over $1900, we would look at this pullback as a great opportunity to cost average in here at these levels and add to your existing positions.
Silver pulled back also and is trading below $27 this morning which too is an excellent buying opportunity here and as one commentator said this morning calling it a ‘Gift’!.
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GOLD PRICES (USD, GBP & EUR – AM/ PM LBMA Fix)
16-06-2021 1858.10 1860.75 1316.84 1318.16 1532.93 1534.93
15-06-2021 1863.85 1865.10 1324.08 1324.59 1537.12 1537.77
14-06-2021 1859.75 1865.60 1319.68 1321.96 1534.67 1539.12
11-06-2021 1891.95 1881.05 1336.47 1331.41 1556.13 1551.30
10-06-2021 1882.00 1888.65 1335.09 1334.90 1546.25 1550.20
09-06-2021 1890.45 1894.60 1332.96 1339.48 1550.74 1551.11
08-06-2021 1892.05 1893.15 1337.87 1339.78 1554.51 1553.71
07-06-2021 1882.05 1888.40 1331.17 1332.83 1547.99 1550.75
04-06-2021 1869.55 1890.60 1323.64 1332.49 1543.69 1552.37
03-06-2021 1892.15 1866.55 1334.34 1323.01 1552.51 1537.48
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