In purely cultural terms, there is likely no other product or commodity known to man more synonymous with quality, success and wealth as the precious metal we call gold (also known as the chemical compound ‘Au’).
After all, many of the earliest stories told to children are fairy tales about buried treasure and pots of gold, and the very word itself is basically a stand-in for quality at this point — society talks of ‘gold standards’, ‘gold medals’ and things being ‘worth their weight in gold’ on a daily basis.
Its no surprise, then, that gold is one of the most commonly bought and sold commodities on the global exchange markets. What’s more, it’s considered a ‘safe-haven’ asset by the majority of forex professionals, and its historical importance has led it to become a benchmark of value for many monetary systems worldwide.
But why, precisely, is gold such a mainstay in the trading world? In order to understand why this humble metal remains such an important product — and, curiously, one that investors flock to when the going gets rough across the wider market — we first need to establish what it means to be a safe-haven product:
What Do Investors Mean by ‘Safe-Haven Assets’?
A safe-haven asset is an informal classification of product that traders frequently choose to invest in during times of pronounced market volatility (or geopolitical uncertainty) as they’re considered a reliable store of value compared to other securities.
These investments most commonly take the form of physical, tangible commodities such as precious metals or energy/fuel sources than have uses outside of the financial sphere. These products seen as relatively ‘safe bets’ as their perceived value is not vulnerable to the same market forces as virtual instruments; as such, they’re more able to weather the metaphorical storm of economic upheaval.
In fact, most safe-haven assets are actually negatively correlated to the market as a whole, meaning that as the price of other financial products (stocks or currencies, for example) goes down, the asset’s value increases in a see saw-like manner.
Further reading: https://www.dividend.com/dividend-education/understanding-safe-haven-assets/
A Brief History of the Gold Trade
As a rare precious metal, gold has been a known and highly sought-after commodity for humans since the archaeological period known as the Copper age (3,500–2,300 BCE), with the very earliest known man-made gold artifacts currently dated around 5,000 BCE.
Indeed, many of the most salient exploration endeavours in history can be, at least in part, attributed to society’s quest for gold — the European exploration of the Americas during the 1500s and the US ‘gold rush’ period of the 1800s being such examples.
Gold’s perceived value made it an obvious candidate for use as a rudimentary form of currency for centuries, though logistical issues led many European nations replace gold coins itself with ‘gold standards’ in the late 1900s, whereby a unit of currency was tied in value to a certain amount of gold as an equivalent reference point.
This approach lasted until the Bretton Woods System was adopted internationally following World War II, by which the United States dollar was pegged to gold at a rate of $35 USD per troy ounce (with other national currencies being valued in relation to that rate).
Though the world’s major currencies have since transitioned to a ‘fiat’ system free from ties to physical assets — the Swiss franc was the last to undergo this change around the turn of the millennium — the price of gold continues to play a major role in the global economy, both as a store of value for investors and an indicator of economic stability in general.
Further reading: https://www.gold.org/about-gold/history-gold/golds-role-money
What Makes Gold Uniquely Valuable?
Both chemically and aesthetically, gold is fairly unique natural substance; compared to the greyish tones that comprise most metals, its deep orange-yellow colouration seems inherently attractive to the human eye.
Gold also possesses a number of more practical properties that make it useful for a wide range of applications. For instance, it is among the most non-reactive of all metals, meaning it is highly resistant to corrosion and does not blemish through prolonged exposure to oxygen. It is also extremely malleable — allowing it to be melted down and cast into all manner of shapes, including elaborate pieces of jewellery — and conducts electricity effectively, the combination of which makes it ideal for electrical wiring.
Above all, however, the continued perception of gold as an inherently valuable substance — even in today’s digitised, high-tech world — is perhaps mostly due to its scarcity: it has been estimated that all the gold that has been mined throughout recorded history would fit inside a single cube measuring 20 metres per side. It’s actually thought that more steel is produced worldwide every single day than the total amount of gold currently in human possession!
Approximately half to 60% of all new gold is used for ornamental/decoration purposes, while around a third is purchased via trading and other investments and the remainder is used for industrial applications. The world’s largest gold deposits — where nearly 60% of all newly mined gold originates from — are found in South Africa, while the US, Australia and Russia are also prominent producers of the precious metal.
Further reading: https://www.bbc.co.uk/news/magazine-25255957
How Can Investing in Gold Protect My Wealth?
Owing to its deeply engrained importance in human society, gold has gained a remarkable ability to maintain its value over time, which has led the practice of investing in gold to be used as a type of unofficial ‘insurance’ policy to protect your money against adverse economic events.
Unlike paper currencies, gold — being a physical commodity — is unaffected by the interest rate decisions of global central banks and its supply cannot be manipulated by simply printing a greater amount; indeed, alchemists throughout history have tried to cut corners and turn less valuable products such as lead into gold with negligible success!
Because of this, speculators turn to gold when the market outlook seems either uncertain or unfavourable, as well as to hedge against inflation when fiat currencies get stripped of their previous purchasing power by market forces or global catastrophes.
A prominent recent example of this phenomenon was the Global Financial Crisis of 2008, when the collapse of numerous major banks saw a huge rise in the number of investors buying gold in an attempt to withstand the coming financial strain. This considerable rush to safe-haven assets saw the price of gold rise 24% in a single year and the upward momentum was maintained well into 2011 as the wide-reaching economic fallout continued.
Further reading: https://seekingalpha.com/article/295567-how-gold-performs-during-a-financial-crash
