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By scott

Gold as Currency

Gold Price as a Currency

The gold price has different meanings for everyone. For some, it is a source of wealth, for others it is the cost of fine jewelry, and there are many more who just don’t really care about it.

No matter what your opinion on the precious metal, gold is an important resource in our world and plays a significant role in our global economy. Even if it doesn’t interest you from an investment or fashion standpoint, the gold price is sure to affect you in some way.

One element of the gold price that many don’t consider is its usefulness as a common currency. Having many different countries trading with each-other in many different currencies presents a real problem in the consistency of the cost of goods from overseas. This is why the US dollar has been adopted as a standard currency for trade around the world. With the value of the dollar falling, and the rise of many developing countries, however, it has been suggested that a new global currency take its place, and the gold price is at the center of this argument.

Is There Value in the Gold Price?

With such a difficult to understand value proposition and tremendous economic weight, many ask “why is it worth so much?”.

Warren Buffett famously has this to say about the gold price:

“(Gold) gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

While this may be true, in most countries gold has a very important role to play through deep rooted cultural traditions and as a store of wealth. It is also true that the gold price is simply the value that we assign to it, but in reality this could be argued for just about any scarce resource or capital in a free market economy.

One of the best ways of understanding the gold price is to simply think of it as a currency. While most other commodities have very real and useful value as a source of energy, construction or as food, gold is quite limited in its general usefulness. Likewise, commodities tend to get used up, contributing to a certain amount of continuous demand regardless of the investment interest in it. Gold, of course is always there. Even if it ends up being used in jewelry you can always melt it down and reclaim it into its purest form.

Gold as a Currency

The reason we can equate the gold price to currency is because it really is just used as a store and transfer of wealth, just like cash. The difference is that cash tends to become devalued over time (inflation), whereas gold price almost always has a consistent value compared to inflation.

There are many economic factors influencing the gold price, but the same is true for currency. If all countries and businesses used gold price as the standard of currency it would lead to much more stable levels of exchange and contribute to an easing global trade. Currently, if a company manufactures a product in one country for sale in another, the fluctuations in exchange rates can lead to huge risks to profitability. The recent rise in globalisation has had more to do with the easing of import duties and the establishment of large-scale trade agreements.

A common currency would be the final consummation of true free trade between countries, also known as a currency union. While this has been tried with a certain level of success in Europe with the establishment of the Euro, the idea of using gold price as a common currency for countries in different parts of the world has been suggested as the next major push towards global free trade.

Just such a scheme has been floated as being plausible by an OMFIF report commissioned by the World Gold Council looking into the potential impacts of changes to China’s monetary policy.

While this type of move would be profound and extreme to say the least, it does show the sentiment towards moving away from currency systems that are easily manipulated by governments and towards a more inclusive system that offers greater stability for the businesses that ultimately engage in trade.

Given all this, it seems that there is a role for gold price as an international store of value and commerce, providing a common currency across international boundaries.

We all know the gold price has fallen recently. Read this article on whether the gold price will come back.

Investing in Gold Factors

Investing in Gold – Factors That Influence the Price of Gold

Understanding the factors that influence the price of gold is crutial before making an investment in the precious metal. Equally important is to be aware of the key differences in the supply and demand of gold compared to other investments such as commodities, stocks and bonds.

Another factor to keep in mind; gold is not the only precious metal to consider when making this type of investment. Silver, Platinum and Palladium are also highly sought-after as investment vehicles, offer similar fundamentals to gold, but each have their own unique characteristics as an investment.

Factors Influencing the Price of Gold Bullion

The value in a gold coin or gold bullion is found in its precious metal content. While gold is pretty to look at in just about any form, when sought after for investment purposes its aesthetic appeal is not usually a consideration. Because of this, the value of gold bullion is tied directly to the market price for gold, and will fluctuate as the market moves, just like stocks, bonds and commodities.

How to Measure the Price of Gold

When quoting the price of gold, most business reports will show the price per troy ounce in US dollars. If you are following the market from outside the US, make sure to convert this price into your home currency, and know that one troy ounce is equivalent to about 31.1 grams.

Also note that the price quoted on the market is always for pure gold. Most jewelry is much less than pure (usually between 40-75%), bullion and coins however, are usually fairly high purities (above 90%).

With an understanding of the mechanics behind the price of a physical sample of gold, you can start to look at the market forces that cause the wide daily swings in price. They are listed in order of their impact on the daily price of gold.

1. Macroeconomic Data

By far the most influential metric on the price of gold is the daily economic information coming out of the worlds markets. Gold has historically always been a “safe haven” type of investment. Like real estate and cash, it is a place to put your money if things aren’t looking good elsewhere. When money is pulled out of the stock market it generally flows towards these types of investments, but in 2008 when the stock market and the real estate market experienced simultaneous crashes, gold seemed like the only safe play and, in turn, began its dramatic gains in price.

2. Inflation Pressure

Inflation is the theory that over time, the value of money will always go down as prices go up. While the average price of a house isn’t $40,000 like it was in 1975, the number of gold bars it would take to buy the same house is pretty consistent: $40,000 worth of gold in 1975 would be worth a little over $310,000 today.

This means that no matter what the market is for gold, in the long run it’s always better than holding cash without earning any interest on it. While gold doesn’t pay interest, its price does generally track the rate of inflation or better.

3. Supply and Demand of Gold

Supply and demand is the main drive of market pricing behind most commodities. While the gold price is much more complex than this basic formula, these factors do come in to play.

The supply of gold is largely dependent on its price, as the cost to mine it has become so high. It used to be quite easy to prospect and mine for gold, with plenty of stories from the gold rush of hitting the mother lode. Nowadays, it’s much more difficult to extract gold in large quantities and requires expensive equipment and technology. Also, since gold doesn’t really get “used up” or consumed the way other commodities do, there is always a large reserve of gold regardless of supply. So unlike most other commodities, the supply of gold will likely continue to be more reactive to its price than to have a direct impact on it.

The demand side is similarly consistent. As the price of gold drops, its demand in the use of jewelry increases (as jewelry is a discretionary spending item), but the investment demand for gold will generally drop as prices move on a downward trend. The reverse is true, of course if prices rise: jewelry demand for gold drops, and investment demand increases.

Future of Gold Prices

Look to the economy and the rate of inflation as the most likely indicators of gold price in the future. Another big recession or a sudden increase in the level of inflation could cause gold to make another big run up. Similarly, if things continue to improve in the global economy and inflation remains in check, gold prices will likely remain fairly stagnant and could even drop a little more.

View this article and others on Ezine

3 Steps to Sell Gold With Gemstones

Most people know that any gold jewelry can be sold off for its precious metal content value quite easily these days through a local cash for gold dealer. A solid piece of gold jewelry can fetch a price well beyond its aesthetic appeal due to the precious metal content or its “melt” value.

One question we get asked fairly often is whether we can purchase jewelry that has gems, and how much we pay for them. While we can purchase any type of gold, whether it has gems or not, we can actually offer a higher price for jewelry with diamonds. For other gemstones we simply deduct their weight from the total weight of the item, and can often remove the gems if you are interested in keeping them. (Scroll past the video to read further)

Small diamonds have very little value on the market, so we simply include them in the gold weight, but for diamonds over 1/4 carat, we can set up an appointment with our GIA Certified Gemologist, Rachel, and make an offer on the diamond separately.

Here are some simple steps to get cash for gold on your jewelry with gems:

  1. Determine the type of gem; if it’s a diamond, it can be added to the price of the item, if not it will be deducted from the weight.
  2. If you have a diamond we measure its size, if it’s larger than 1/4 carat, we can set up an appointment in our Vancouver or Surrey office to have it evaluated by our gemologist.
  3. We determine the precious metal content by deducting the weight of the gem and multiplying by the current market price of gold.

It’s as simple as that! Any gold or silver item can be sold through our stores, and if you’re lucky enough to have jewelry with a nice sized diamond, then we can make you an offer on that too.

Please contact us to set up an appointment if you have a diamond, or simply stop by your nearest location for an on-the-spot no obligation quote.

Carats vs. Karats

What is a carat?

A carat is a unit of weight principally used for measuring diamonds and gemstomes. Each carat is exactly equal to 200 milgrams, or 0.2 grams. The origin of the word comes from the carab seed, which is a seed that was thought to have very little variance in weight and could therefor be used as a consistent form of measurement. In reality however, there was a significant variation in weight between the seeds and as a result of this dishonest classical gold traders could have two sets of carab seeds – a heavier one used for buying (heavy seeds make the same piece weigh less carabs) than for selling.  Clever customers would pick up a handful of their own carab seeds on the way to sell their gold to ensure fair treatment.   

What is a karat?

A karat (usually spelt with a K to avoid confusion with carat) is a measure of the purity of gold.  A karat of gold refers to the number of parts per 24 that are pure gold. As an example, 24 karat gold is 100% pure and 10 karat gold jewellery is, by weight, 10 parts gold and 14 parts other metals or 41.6% pure.   

The origin of karat as a measure of purity actually originated from the use of carat as a measure of weight. There is some debate over whether the use of karat came from the Roman coin the “solidus” or the German coin the “mark”, but whichever coin it was the story is the same. The mark/solidus weighed 24 carats or 4.8 grams so people would refer to the coin as 24 carat. When a coin of the same weight but less purity was minted people referred to the new coin as a lower carat even though the weight remained the same. A 12 carat coin for example would weigh 24 carats, but only contain 12 carats worth of gold (as it was only 12/24 = 50% pure).  From there it became understood and accepted that carat would be used as a measure of purity with a base of 24.

The conventionally spelling when using carat to refer to a purity of gold was changed to karat to avoid confusion, although the spelling of carat is still often used to purity.

What is a carrot?

A carat is an orange vegetable worth nothing near gold or diamonds unless you are sufficiently hungry. 


What’s Next For the Gold Price?

It is very difficult to predict whether people will perceive the drop in gold price as an opportunity for a bargain or a sign that gold is a risky investment. Since gold demand for both investments and (in part) jewellery are driven by speculation, the balance of these two conflicting market ideas will determine what is next for gold price.

My colleague Gregory Neilson recently shared his thoughts on the inflationary pressure that is affecting the price of gold in Canada.  You can read his blog post on gold price here.


Gold Supply

The supply of gold is “sticky”, but flexible. The rising gold prices have pushed mining companies to expand exploration and mine production. The output can lag behind the exploration by about 10 years in order for the mine to get going, but we are seeing increases in mine production already.

About 2/3 of supply annually comes from mine production. The remaining supply comes from recycled gold and when prices are higher more people consider selling. The long term increases in supply that come with the higher prices obviously create downwards pressure on gold price.

My colleague Gregory Neilson recently shared his thoughts on the inflationary pressure that is affecting gold prices, you can read his blog post on gold prices here.


Investment Demand for Gold

The demand for jewellery as an investment comes in large part from reputation. While there are no direct factors that link gold prices to inflation, the US dollar, or economic and political concerns, investors’ expectations – as long as enough people believe – are powerful enough to create a relationship.

Bad news about the economy in the US and Europe sent more and more investors to gold as a perceived safe haven. The more investors who bought in, the higher prices rose justifying their purchase and creating a self-fulfilling prophesy. The fundamental problem is that this is the description of a market bubble. The fear is that the market created a pyramid scheme effect whereby the value and use of gold had barely increased but the speculative force caused prices to rise to a point that may not be sustainable in the long run.

Even the types of events that might usually lift prices can sometimes have the opposite effect because of real world supply pressure. The recent fall in prices is partly attributed to the idea that the struggling Cypress might sell their gold reserves to raise money. This comes after part of the previous rise in gold prices having been a result of investors rushing to gold to protect their wealth against the economic troubles in Europe.

My colleague Gregory Neilson recently shared his thoughts on the inflationary pressure that is affecting gold prices, you can read his blog post on gold prices here.


Jewellery Demand for Physical Gold

When reading about what caused the recent climb in gold prices, you will rarely hear someone mention the increasing demand for jewellery as one of the principal factors. People seem to focus largely on investment demand and external factors while ignoring jewellery – the unsung hero of the climb.

The huge factors increasing jewellery demand are the booming economies of Asia, with a particular focus on India and China where gold traditions are paired with a rapidly growing middle class. This may sound like a very promising factor contributing high demand for jewellery but I believe that, in these markets, gold jewellery is purchased as an investment and a store of wealth.

The jewellery culture in Asia is far different from North America; with high purity and heavy gold pieces trading for a very small jewellery premium, and mostly in the physical gold content. People have been buying jewellery in these markets because the consensus was that it’s smart investment and that prices will continue to rise. I think that with the recent fall in gold prices, jewellery demand in these countries will be tested.

My colleague Gregory Neilson recently shared his thoughts on the inflationary pressure that is affecting gold prices, you can read his blog post on gold prices here.


Comparing Gold, Stocks and Commodities

For the purposes of this post, I have examined gold from a supply and demand perspective rather than taking the traditional assumptions about what should move gold price.

The traditional narrative about gold prices is that gold is a safe haven investment and a way to protect your wealth against one of the following: inflation, weakness in the US dollar, and economic or political turmoil. These ideas are largely the result of gold’s historical use as a currency (or as a means of physically backing a currency) but in reality the most significant link between gold price and any of these factors exists simply because investors perceive that there is some link (and know that others do as well) and purchase accordingly. I would argue that a speculative link is not meaningful and can create a bubble that will eventually burst.

Unlike an investment like stocks, where the investor owns a piece of a company’s assets and profits, gold is a commodity (in the same category as agricultural outputs, oil, and building materials etc.). Stock prices are a result of the markets judgement of a company’s value taking into account, among other things, assets, profits, growth and risk. Commodities, on the other hand, are typically goods that can be spent, consumed or used.

With most stocks and commodities, the market gives frequent signals as to where the price should be. A stock that is expected to experience large growth, for example, will probably decline if the quarterly numbers come in below expectations (even if the company still made money and grew). These frequent corrections make long term speculation less common and reduce the likelihood of a long term bubble.

For a typical commodity, like corn for instance, the value comes from the intersection of supply and demand that creates the price. For example, if more consumers or industries demand corn, the prices will rise. Similarly, if there is a poor year for growing corn, the scarcity might cause prices to rise because of the lack of supply. Speculative markets for corn and other commodities certainly exist (the Chicago Mercantile Exchange being the large one), but the prices receive frequent feedback from the market and the commodities are typically consumed.

Unfortunately, gold is different.

Very little of the demand for gold comes from practical uses and purposes. Unlike other commodities, gold is not consumed by being eaten, fuelling cars, or used in construction. Almost all the gold that has ever been mined is still available for circulation. Only about ten percent of gold sold each year is used for its practical properties, the majority of which is used in technology. Even this gold is not spent or consumed – the tiny amounts of gold used in electronics are still so valuable that they are worth salvaging and very often will be melted, refined and added back into circulation. The rest of gold demand is split between jewellery demand (43%), Investment demand (35%) and official sector purchases (12%).

My colleague Gregory Neilson recently shared his thoughts on the inflationary pressure that is affecting gold prices, you can read his blog post on gold prices here.

History of High Gold Prices

Before the Climb: a brief History of Gold Prices.

First, a quick look at what gold was going in the decades leading up to the climb of the 2000s.

For twenty years starting in the early 1980s, it was not a very pulse-pounding time to be a gold investor. Gold Prices were hovering around $300/ounce, but no real gains or losses were made. The 1970s though had been an exciting decade for gold with the end of the gold standard (pegging gold to $35/ounce) in August of 1971 allowing gold prices to move freely for the first time. Amid strong oil prices, high inflation and geopolitical concerns, gold prices took off and prices shot up to $850/ounce (correcting for inflation that would work out to over $2000/ounce in today’s dollars). Then the bubble burst and, after a bumpy ride for a couple of years, prices levelled out around $300 with very little action.

In the short history of freely floating gold prices, the rapid rise and fall of value in the 1970s demonstrate that the prices can be quite volatile and the stagnation in the 1980s and 1990s demonstrate that prices have not always been rising.

My colleague Gregory Neilson recently shared his thoughts on the inflationary pressure that is affecting gold prices, you can read his blog post on gold prices here.