Commodity Fundamentals: How to Trade the Precious Metals, Energy, Grain, and Tropical Commodity Markets

CHAPTER 6

Gold

OVERVIEW

Gold, a dense metallic element, is unaltered by air, heat, moisture, and most solvents. The near indestructibility of gold means that the vast majority of all this metal ever mined is still in existence. Some is held in jewelry, coins, and medals; some is in industrial use and equipment; some is hoarded; and some is in government hands. Hoarding of gold is common in many countries thanks to the centuries-old use of gold as the ultimate standard of value in times of depression, inflation, or unrest.

People began using gold as a standard of value in the second millennium BCE when gold and silver became the currency of Mediterranean trade. Gold and silver coins continued to be principal forms of money for approximately 3,500 years.

In the 17th and 18th centuries, there was a move away from gold coins in favor of paper currencies as people deposited their gold with local goldsmiths for safekeeping and received receipts for the amount deposited. These receipts then circulated as money in place of gold itself. As the industrial society developed, increasing demand for money stocks in order to carry on expanded commerce, paper came to replace gold for normal, everyday transactions. Paper was easier to carry than gold; and as long as people accepted paper in lieu of gold, it served as a convenient means of payment.

Great Britain was the first country in modern time to officially tie its paper currency to gold when, in 1816, it stated the value of an ounce of gold ...