The History of Trading Gold
Gold trading may seem like a current national obsession, as the difficult economic circumstances encourage more investors to look into the gold trading market as a way to diversify their portfolios. More traditional savers are moving away from the sub-inflation paying savings accounts and looking for alternatives for maintaining and growing their assets.
But why does gold carry such value? It helps to investigate the long and fascinating history of gold trading to understand this precious metal's value within its ancient historical and social context. Even in the most ancient cultures and societies, gold was considered a sign of social status, wealth and position and it was chosen by the same early societies as a measure of currency. Ever since, this seductive, beautiful metal has entranced collectors and investors alike and continued to be a vital material in both business and trade.
Why Is Gold So Valued?
Individuals value gold as a sign of wealth, as do many organisations and businesses. Witness the use of gold in many ancient palaces, churches and in jewellery to see how this metal conveys wealth and prestige. Nations value it as a standard of currency and an exchange measure. Investors value gold as an insurance measure, as it holds its value far more than paper currencies. So, this one metal has a range of values and interests for different people.
Gold As An Exchange Measure
The gold standard has traditionally been the world's primary monetary system, where fixed economic units are determined by specific gold weights. Within this standard, issuers of a currency guarantee to redeem their notes against the corresponding weight of gold, if the note's bearer so demands it. Of course, this doesn't happen in practice, but the principles of the standard have long underpinned the modern currency market and economies. Governments that historically employed this fixed unit of account and which would redeem their currency notes to other governments for gold were known to share fixed-currency relationships.
For and Against the Gold Standard
There are supporters and critics of this standard, but those in favour claim that it's more resistant to debt expansion and credit than other measures. The money that is backed by gold cannot be created by governments arbitrarily, without the actual gold to back it. This means that fiat currencies cannot be created and the corresponding restraint in currency creation helps to avoid artificial inflation (e.g. currency devaluation).
This removes uncertainty around currency and helps to encourage lending, whilst keeping the credit of the authority issuing the money, sound and true. However, not all countries have traditionally been under an entirely 100% gold standard. For example, some countries use manipulated paper currencies simultaneously and these have undergone depressions and various debt crises throughout their currency history with both inflation and central bank manipulation having occurred. An example of this is the USA, which experienced both features in its famous Panic of 1819, after its secondary national bank was chartered in 1816.
When Was the Gold Standard Set Up?
This is a disputed question, although most believe it was in 1717, by Sir Isaac Newton, who first compared the value of silver to gold in his measurement systems. The first international gold standard didn't come into common use, however, until the 1870s. By the 1890s, it wasn't popular in the more industrialised nations. Political movements started in favour of paper-based currencies, particularly as the gold standard had experienced a number of high / low fluctuations. These problems were compounded by the world wars and the 1930's Depression, which had serious and long lasting repercussions on global finances.
The Bretton-Woods Agreement
In 1944, the Bretton-Woods agreement was made to establish the rules that would govern finance and business relations between the different nations and it aimed to control the global Forex market and maintain its strength. Those countries that signed the agreement did so with the aim of keeping their currency value within a narrow range, measured against both the U.S dollar and equal gold rates. The U.S dollar gained the currency top position and economic power rapidly moved from Europe to the U.S. The Agreement was destroyed in 1971, when U.S dollars could no longer be converted into gold. Instead, the currency market began to be controlled by the economic forces of supply and demand and free trade came into play, along with a series of new and complex financial instruments.
Today - Fiat Currency
In Britain specifically, the gold specie standard ended when World War I broke out. Instead of gold sovereigns, treasury notes were circulated. In 1931, the UK left the revised gold standard of 1925, due to the large outflows of gold heading over the Atlantic. This benefited the UK, which could then stimulate the economy using monetary policy, such as by lowering interest rates. Australia, New Zealand and Canada rapidly followed suit.
Today, nations use fiat currencies, although the gold standard is still used by some private institutions that supply digital gold currencies based on accounted gold as money.
The Impact of Technology
Today, technology and the internet have the greatest influence on the Forex market. Brokers, traders and investors the world over can exchange currencies on the open market and gold is considered to be another currency, which can be traded accordingly. Its value or trading place is expressed in U.S dollars. The influence of online trading and digital business and commerce means that many of us rarely touch physical money in any real sense; it is, instead, a series of numbers and figures shown digitally on screens. Trade is usually done digitally, using digital certificates and other vehicles without physical assets attached. This is a huge change from the trade of old, which would have involved physically taking possession of investments of value. However, some gold traders today do still prefer to do this and take physical hold of gold coins, bullion and other types of gold investment, such as antiques and jewellery.
The internet also means that trading is now available to the many, rather than a few brave investors and 'middlemen' can increasingly be removed from the trading equation, giving the individual investor greater power than ever to carry out their own purchases and sales on the gold market. Trades can happen at any time of day and prices can be accessed in real time, online and on the user's laptop, tablet or even smartphone.
History of the Gold Trade - Pointing Towards the Future
The history of the gold trade is certainly an interesting one and understanding it broadly helps to position the history of international trade in the Forex market and the work to make it effective. In the near future, of course, the advent of the internet and online trading will also become history and students will view it as a significant step change that disrupted traditional trading methods by empowering traders and speeding up processes, within a more transparent trading environment. It remains to be seen where the gold trading market goes next and we await with interest to see how further technological developments, economic changes, legislative developments and social and political developments worldwide develop it further.
