Gold is a precious metal and its price since its discovery is usually determined by the open market. However, a bench mark figure is set daily through a procedure referred to as gold fixing and this benchmark figure controls the gold industry thus the prices of gold. This gold fixing procedure was introduced in 1919 and it originated from London where it is still practiced even today. Gold is usually measured using grams and also by troy weights like all other metals considered precious. In the past, gold was being used as currency and this only ended with introduction of paper money.
In 1968, the economic conditions which were prevailing led to the formation of a two-tier pricing scheme. Under this format, a standardized currency based on the gold value at that time was allowed to settle all international accounts while gold trade at the private market was being controlled by the market forces. This arrangement however ended in 1975 and gold started operating in a free market. This caused the price of gold to fluctuate with the price rising to $850 per ounce of gold in 1980 to as low as $252 in 1999.
The historic prices of gold have been known to fluctuate greatly although a benchmark figure is set to ensure that the price do not exceed the upper and lower limits. Before the collapse of the gold standard in the 1970s, the price of gold was highly influence by the United States dollar since the dollar was pegged on the gold (GOLDPRICE. ORG, Para 1-5). This research paper will evaluate the impacts that the current recession may have on the prices of gold, the differences between government and gold investment, the causes of gold fluctuations as well as the effects that gold fluctuations may have on the present value of money.
Impact of recession on gold prices One of the questions which are being frequently asked today is what would happen to the prices of gold as a result of the recession or depression being experienced in United States. A research conducted by the world gold council aimed at comparing gold performance during the recessionary periods. However, it has been established that gold prices are not affected by the global recession. During recessionary periods, the must be losers and winners based on the terms used in evaluating asset performance.
Fixed income assets like gold tend to win during such periods while cyclical stocks lose. An analysis on correlation and regression carried out during a recessionary period in the United States showed that there is no possible relationship between the growths of the country’s GDP and the gold price changes. As such, a recession does not impact negatively to the prices of gold. This underpins the role of gold as a diversifying asset especially in times of recession and also outlines the forces that control gold prices.
The recession unlike it was widely believed has had positive impact for gold prices despite the decline in the dollar strength (Connell, Para 2-4). Due to the recessionary period being experienced in most parts of the world, more people have turned to gold investment thus making the present value of money to decrease. An increase in gold trading would lead to an increase in the gold prices thus purchasing the same value of gold for more money. This would mean that the value of money would have gone down. On the other hand, a decrease in the volume of gold would lead to and increase in the present value of money (Potter, Para 4-5).
Gold investment versus government investment There is a heated debate on what form of investment is more viable and beneficial between gold investment and investing in government securities or bonds. Both of these two investment options have their advantages and disadvantages. Gold investment is recognized as one of the best investment since it offers solid investment. As noted above, gold prices are not adversely affected by the recessionary periods meaning gold can still maintain value of investment even when there are economic crisis in a country.
The fact that gold prices are not negatively influenced by recession makes gold investment more attractive than investing in government bonds especially in times of economic crisis (Willink, Para 2). However, gold investment is a risky investment especially for a person who is not an expert in the gold field. Also, some forms of gold can be confiscated by the government in times of war leading to big losses. Government bonds on the other hand amounts to lending to the government which is usually done at a fixed rate of interest.
The bonds are considered to be risk free and also repayment is guaranteed. This form of an investment does not yield higher returns to the investor making it less desirable. Due to the improvement of technology and globalization, investing in gold is becoming risky as they are chances of being cheated. Gold is also very costly and the returns may not be good especially due to the form of market in which gold operates. As such, investing in government bonds would be more effective since the risk involved is minimal and returns are guaranteed (Willink, Para 3-6).
Causes of gold price fluctuations Gold prices are regulated by the market forces and as such they are subjected to the law of demand and supply which explains the gold prices fluctuations. During inflationary periods, people buy more gold for investment since it is not affected by inflations. This leads to an increase in gold demand thus the prices. On the other hand, people sell their gold investment during the boom period making the price of gold to decrease. Demand and supply forces are major contributors to the fluctuation of gold price.
Another possible cause of gold price fluctuation is the exploration cost of gold and also the cost involved in developing gold to make the needed products such as jewelry. When exploration and manufacturing cost increase, the price of gold and gold products also increase and vice versa. Fluctuations in the paper currency may also affect or lead to price fluctuation of gold. When paper money loses value or individuals lose faith in a country’s currency, the demand for gold increases leading to price surge (Jackson, Para 1-4).
Conclusion Gold trading is one of the oldest forms of trade in the world. In the ancient times, gold was being used as a means of exchange and was used as a standard that was being used in the international markets. During the gold standard, the dollar was pegged on gold and was used to ensure equitability and measurability. However, after the collapse of the gold standard, gold prices were left to be determined by the free market which has led to the fluctuations being experienced in the gold market.
Unlike in the past, more people are turning to gold investment mainly due to its resistance to global market fluctuations and economic crisis. However, gold investment is one of the most risky and also lucrative investments as it may lead to huge losses or huge profits. Investing in this market also requires experts due to the complexity and instability of this market. Reference: Connell, Rhona: What does a US recession imply for the gold price? (2008). Retrieved on 16th March 2009 from, http://www. ibtimes. com/articles/20080604/what-does-a-us-recession-imply-for. htm.
GOLDPRICE. ORG: Gold Price History. Retrieved on 16th March 2009 from, http://www. goldprice. org/gold-price-history. html. Jackson, Dave: Why Gold Prices Fluctuate. Retrieved on 16th March 2009 from, http://ezinearticles. com/? Why-Gold-Prices-Fluctuate&id=720555. Potter, Christopher K. : Gold Money. (2007). Retrieved on 16th March 2009 from, http://news. goldseek. com/GoldSeek/1194370818. php Willink, Andrew: Alternative Investment Round-up. (2008). Retrieved on 16th March 2009 from, http://www. ratecity. com. au/savings-accounts/info/alternative-investment-round-up/.
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