Something Shiny: the history of gold

Our first encounters with gold were probably way back in prehistory when generally pottering around in streams we discovered that just about everything that glittered was gold. Widely dispersed around the world, gold was discovered by many different groups over the centuries. Its incredible lustre, workability and resistance to tarnishing made it more special than any other possession. Initially valued for its beauty and extraordinary enhancement of artistic works, it became a mark of wealth long before it became money.

An economy of things

Throughout history, gold became increasingly seen as a measure of value for land, for possessions, for status, for the gods themselves. It belonged by right to the cultural elite. It was associated with glorification and the treasure most desired; a gift most highly valued of all. We liked it. And we wanted it. Perhaps the psychology of modern economics which governs us mind and body today, began with just that one desire.

In the beginning gold was associated with worship and decoration, used at sacred sites and adornment on religious artifacts. People went to extraordinary lengths to obtain it, including, amongst others, the Phoenicians, Egyptians, Indians, the Hittites, and the Chinese. Beautiful and scarce, its universal appeal meant that it would inevitably find its way into the bartering process in measurable units of value that would form the basis of money.

A glint in the eye of history

Homer, in both great works of the “Iliad” and “Odyssey”, makes mention of gold as the glory of the immortals and a sign of wealth among ordinary humans. In ancient Egypt, as far back as 3100 BC, there is evidence that there was a gold/silver value ratio in the code of Menes, founder of the first Egyptian dynasty. The code states that “one part of gold is equal to two and one half parts of silver in value”. Gold was clearly placed at the highest value more than 5,000 years ago.

But the first to use it as a factor of trade were the Greeks who had mined it from Gibraltar to Asia Minor. The Romans followed by introducing more sophisticated methods of hydraulic mining, sluice building and designing the first ‘long toms’. Gold and silver began to flow to India for spices and to China for silk. Gold had established a firmly defined place in our pockets.

In order to control this burgeoning gold economy, a monetary standard had to be created that would allow small pieces of gold in the shape of coins, to express an agreed value, so that people knew where they stood; how many gold coins or – as in later developments – representations of gold – would return how many items of goods. And so the gold standard was created.

The story of the Gold Standard

On the gold standard all currency and paper money had a value that was directly linked to a fixed amount of gold. Gold itself had a fixed amount of value and was traded at that price. Pound sterling meant exactly that; in this instance a pound of silver would be paid to the bearer of the pound note. England only formally adopted the gold standard in 1819.

Initially the arrangement was largely voluntary among countries. Countries could opt out if they wished – and several did from time to time. But by 1910, most countries in the world worked officially with this system – with gold alone as the standard of currency value. This allowed regulation which made international trade and investment a much easier process. It was the first great age of globalization.

Generally the system worked very well – and might still be working except for two pertinent factors. The first was World War I. The gold standard system created roughly from 1870 to 1914 was near perfect – but after hostilities and distrust between countries, not to mention the enormous cost of the war resulting in participants resorting to inflationary finance, several nations began to manage their economies by floating their currencies.

In 1971, the decision by the United States to finally leave was the impetus that forced other major currencies to eventually go off the gold standard. By 2013, with a growing scarcity of gold, no countries were using the gold standard. Central banks now issue what they call “fiat currencies” – money that is not convertible to a physical metal on demand. This change has given governments the flexibility to adjust or devalue currencies to deal with debts. Unfortunately, this ‘jiggering’ of economies has led to devaluation of money and the dangerous production of more paper money where there is no fixed value behind it. Returning to the gold standard system would probably be a good idea – but we could probably never reinvent the pre-1914 model today because we are at the point where we now have too much paper chasing too little gold.

Investing in gold

Of all precious metals, gold is still the most popular, and still plays an important role in global economics. Its price today is determined solely by demand. This tangible value of gold as the basis for real value – whether acknowledged by central banks or not – will never change. Its value cannot be altered or controlled by governments. Rather than an asset to be speculated, it should be viewed as a defensive measure that will hold value against the turbulence of the dollar and other currencies. While the gold market is as subject to volatility as any other, it is still seen as a popular way of diversifying risk through physical ownership, mutual funds or options and futures.

Ownership: the best forms of gold ownership are through minted coins: one-ounce South African Kruger rands, Canadian Maple Leafs, or American Eagles.

Mutual Funds: For people who are hesitant to invest in physical gold, but still desire some exposure, gold mutual funds provide an alternative. These funds hold portfolios of gold stocks of companies that mine for gold. These are usually senior stocks – stocks of large, well-capitalized companies with established mines that produce reliable quantities of gold each year.

Options and futures: Options allow you to speculate in gold prices – but it’s a risky business and you can lose more than you win. The options market is complex and calls for experience and know-how. Even more complex is the futures market and while a canny investor can net a fortune, others can lose fortunes in an instant. Most people need sound advice before venturing into this high-risk area.

Our eye for gold today

At Foster Wealth we tend to see gold everywhere – in our staff, in our clients, our history and work ethic. Gold is still the way we judge the best, the most valued. And we don’t just value real gold for its brilliance but also for its stability and influence. In minds and hearts it still subtly underpins all economic significance and desire. At face value it is just a pretty metal from the ground – but history and our eye for shiny things has made it an integral part of any wealth-building portfolio. Let us help you to make it a valuable part of yours.

Find us at: www.fosterwealth.co.za