The traditional assets that people invest in are typically stocks, bonds, cash and sometimes real estate. There are also mutual funds related to all of these asset classes. Where does λιρα αγγλιας τιμη σημερα fit into this picture? Gold traditionally was only used to hedge against inflation or when there was economic crisis in the world. The last time when gold had a large increase in price before now was in the 1970’s. This period was characterized by world turmoil, high debt and high inflation.
Gold is thought of as a metal which is used in jewelry and ornaments, but this is only a part of the picture. These uses are an attempt to classify gold by what it physically does versus what it represents. The reason why gold is used to hedge inflation or economic events is because gold is money. If you need proof of this, understand that the biggest buyers of gold have been central banks. They are not using gold to make jewelry, but to backstop their respective currencies. Lately, they have been net buyers after many years of being net sellers. If gold is out of date as a currency, the central bankers would not be interested in gold today.
Gold is the one of the longest running currencies in the history of commerce, and it was used in many cultures to represent wealth. This concept is still true today, but it has been obscured by the fact that the US dollar is now a representative currency or reserve currency for that wealth. You have no doubt heard of the “gold standard”. There was once a time when all of the currencies of the world were exchanged at a fixed rate to gold. Gold was essentially the base currency for the world, and then all of the other currencies like the pound, yen, dollar and franc were compared to the value of gold. Only recently was the US dollar used as a proxy for gold. This was done at first because the US government had a sufficient amount of gold to back up the representative value of the currency. This is like saying that the US dollar was a receipt that represented real gold stored in a government vault. When the dollar was taken off the gold standard, the receipt now had no gold backing it up. Instead, the power of the US treasury to tax people or generate value is where the dollars’ worth comes from. Implicit in this idea was simply a matter of trust that the government, or whoever issued the currency would always create value that the currency unit represented. At the time that the gold standard was disabled, the national debt and deficit were not as large as today. At the present time, the debt has grown so large that there is talk about government bankruptcy.
What does this have to do with your investing? Gold should not be treated like any other industrial metal, but more like currency. Like other currencies, what gold will buy in your dollars will change every day, similar to how many Euros you can buy with your dollar. This is one reason why gold is volatile, and it has risks like any other investment. What would affect the price of this gold? There are always many factors, but in terms of a currency, its purchasing power is the key variable in understanding the gold price. Since currencies are relative to other currencies, the way to look at gold is – how much of it is there compared to the other currencies of the world? Since all of the other currencies are based on trust, and currencies can be issued in any quantity at any time, this is a clue as to how to proceed. Gold is expanding every year due to mine production, but this is relatively slow compared to the issuance of other currencies, which are essentially issuing new debt.
