Financial Information: The History Of Gold Commodities

Learn the history of gold and commodities. Find how the history of gold influenced the development of world trade.

Gold has a long history as an important commodity of trade. All early civilizations -- Babylonian, Egyptian, Mayan, Minoan and others -- produced elegant works of art in gold and the use of gold as a medium of exchange goes back at least 5,000 years. For several thousand of those years there were some difficulties with determining the true value for pieces of gold of varying weights and purities but by the 5th century B.C. monarchs were issuing standardized coins of known weight and purity.

Unlike the wheat, rice or cattle that it could buy, gold did not have an intrinsic value. But because of its beauty, immutability and rarity it has been accepted as a store of value for thousands of years, as other stores of value (beaver pelts, wampum, the stone money of Yap, the paper currency of Tsarist Russia) have been abandoned. Trading in the rather limited supply of gold was largely restricted to the aristocracy and a small bourgeois trading class elite until the discovery of the western hemisphere. The gold brought back from the Spanish Empire stimulated trade throughout Europe, with much of it passing through the hands of German, French and British banking houses. Later gold discoveries in California, the Yukon and southern Africa further expanded the supply of gold acting as a store of value.

It is somewhat misleading to think in terms of gold as a commodity prior to the last few decades. Through most of history, gold was seen as MONEY, a store of value with which to buy commodities such as wheat, iron, cattle or land. The governments of most countries based their currency on the gold standard (there were a few exceptions such as silver being used in China and copper in Sweden early in the modern period) and gold was the internationally-accepted means of settling accounts between countries. The United States had adopted a bimetallic silver/gold standard (with a 16:1 exchange ratio) in 1792 that, with minor changes, lasted until less than two generations ago. During the 1960s silver coinage for circulation ceased and in 1971 President Nixon took the United States off of the gold standard. Since that time, the price of gold in dollar terms has, as a commodity, been subject to free-market price fluctuations.

The price of gold, which had been officially pegged for many years at $35 per troy ounce and briefly at $42 per ounce entered an upward phase for several years and briefly peaked at $825 per ounce during a precious metals bubble in January 1980. It later dropped to under $300 an ounce but in the 1990s and the early years of the 20th century, the price has strengthened in part because of speculative investor demand and in part because of gold's widespread use in jewelry as its many industrial/electronic applications.

Investors who are interested in investing in gold as a commodity have a wide range of options. Those with deep pockets can buy 400-ounce bars of gold just like the ones held in Fort Knox or the basement of the Federal Reserve Bank to settle accounts between nations. They can take physical delivery or, for a small fee, have it securely stored.

Some investors prefer numismatic gold coins but the level of knowledge required for numismatic investing is quite high and probably not appropriate for most investors. Many investors opt for bullion coins, a liquid investment available in many forms. One-ounce gold bullion coins are available in many versions from the mints of the United States, Canada, China, Australia and other countries. Smaller coins are also common in one-half, one-quarter, one-tenth, and one-twentieth of an ounce but the smaller denominations all tend to have rather high markups compared to their value as bullion.

Investors who don't want to deal with the storage and security considerations for a significant amount of bullion can use investment instruments such as the Perth Mint Certificate Program, the Central Fund of Canada (50-50 gold/silver, trades on the American Stock Exchange) or the streetTRACKS Gold Exchange Traded Fund (New York Stock Exchange). The Central Fund of Canada and Perth Mint programs take physical possession of the precious metals that they buy but the streetTRACKS fund is designed to track the price of gold via derivatives.

Gold as a commodity is also traded in the options and futures markets but the amount of leverage possible (often with only 10 or 20 percent margin) makes it a high-risk venture suitable for only the savviest of investors and those able to withstand large losses.

A compromise between investing in gold bullion as a commodity and the high-risk world of the options and futures markets is to invest in the shares of gold-producing companies or smaller exploration- and development-stage companies that own or have options of gold-bearing properties but have not yet brought mines into operation. Investors can buy shares in individual companies or put their money into gold-oriented mutual funds.

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