The use of gold can be traced to the earliest manuscripts ever found. Its use as a prestige commodity and form of exchange is found in all these historic books. In the early 1900s, the world came to what was known the gold standard. During this time, gold was the only recognized means of exchanges. When the first world war started, Germany abandoned gold because it was not in abundance enough to support the purchases of weapons. In 1944, the Bretton Woods agreement came into being at a United Nations meeting. The agreement established the dollar as the world’s reserve currency. All currencies were pegged to the dollar.
In 1970s, under President Richard Nixon, parts of the Bretton Woods agreement was abandoned. This led to the massive surge on the price of gold. The price of gold had its biggest rally in the 70s, rising from $35 in 1970 to $127 in 1973. It continued rising and after the collapse of the Shah regime in Iran, the price reached a high of $850 per ounce.
The role of gold in the marketplace today is different from other metals. Gold has no major industrial use unlike its other peers. For example, silver is used heavily in cutlery manufacture while platinum and palladium are used in the vehicle and machinery manufacture. Gold on the other hand is used in the ornament manufacture and has no other major uses. Most gold that is mined is bought by central banks and other institutional holders for use as an investment instrument.
Gold price is quoted in dollar terms. This means that a rise in the value of the dollar will lead to a decline in the price of gold. Therefore, most traders who are concerned about the valuation of the dollar tends to stay short gold and vice versa. In addition, gold is used as a safe haven commodity with investors rushing to it when risks increase.
In the past few months, the price of gold has been falling and this week, it crossed the important support of $1200 per ounce. This is a sad situation for gold but one that was expected. The Federal Reserve has sounded very hawkish in the past few months, promising two more hikes this year. As the yield of the dollar increases, and considering that gold does not have a yield, the value of gold tends to fall.
The decline in gold prices may continue to increase as the Fed continues to tighten and if the central banks in the UK, Japan, and EU continues with the easing regime.
This comes at a difficult period for gold miners. Since gold is found deep inside the earth’s crust, it becomes very difficult and expensive for the mining companies. In South Africa, mining companies have announced plans to shut down mines and fire tens of thousands of people. The same trend is continuing in other countries like Australia, Russia, and Indonesia.
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