【AUVESTA】Which event is a turning point for gold? Why is gold attracting attention today?

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2021 年 8 月 18 日

Learn about the history of gold and why it is still a promising asset today

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Classical Gold Standard

The gold standard is a system under which all countries link the value of their currency to a certain amount of gold, or link their currency to another country’s currency that is already linked to a certain amount of gold. Domestic currency can be freely converted into gold at a fixed price, and gold input and output are not restricted. Gold coins, together with other metal coins and banknotes, circulate as domestic currency, and the composition of gold coins varies from country to country. Since the value of each currency is determined by a certain amount of gold, the exchange rate between the currencies participating in this system is therefore also determined.

The gold dollar standard system established in 1945-Bretton Woods monetary system

The post-World War II world needed a brand new international system to replace the gold standard, which was already evident during the Second World War. The Bretton Woods Conference held in the United States in 1944 drafted a blueprint for the system. The political and economic status of the United States makes the U.S. dollar naturally at the core of the system. After experiencing the chaos between the two world wars, countries yearn for stability because a fixed exchange rate is seen as important to trade, and they also yearn for greater flexibility than the traditional gold standard. The system established at the meeting linked the U.S. dollar to gold at the gold parity of 35 U.S. dollars an ounce at that time. At the same time, the currencies of other countries were pegged to the U.S. dollar, but the exchange rate was adjustable. Unlike the classical gold standard, this system allows countries to exercise capital controls to stimulate their economies without being punished by financial markets.

In 1945, the IMF (International Monetary Fund) was born and established the “golden dollar standard”, which used gold with international value and the dollar, the currency of the United States, which had the strongest economic strength at the time, as a means of settlement. It is stipulated that the United States can exchange 35 dollars per ounce for gold at any time, and it also determines the exchange ratio between the U.S. dollar and the currencies of other countries. This is called the “Bretton Woods System (fixed exchange rate system)”.

The Nixon shock in 1971 was an important turning point

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The Nixon shock in 1971 was an important turning point

The Nixon incident in 1971 was an important turning point for gold for the world economy. Announcing the abandonment of the exchange between the U.S. dollar and gold, and abolishing the gold price of 35 U.S. dollars per ounce stipulated by the Bretton Woods System in 1945, and then determining the price according to demand and supply. In addition, the currencies of major countries have changed from fixed exchange rates to floating exchange rates.

Reliance on the U.S. dollar declined, and the gold-dollar standard collapsed

The sudden abandonment of the exchange between the U.S. dollar and gold stipulated by the “Bretton Woods System” is called the Nixon shock. After the 1960s, because of the Vietnam War, the United States’ overseas debt increased and its fiscal revenue deteriorated. “Can the exchange with gold be guaranteed?”, “Is it okay to continue holding US dollars?” Due to this kind of anxiety, the trend of dumping US dollars for gold is active. Germany, France, Switzerland, etc. exchange large amounts of U.S. dollars for gold, and the gold held by the United States has repeatedly been emptied. At its peak, the total amount of gold in the world was 30,000 tons, and the United States had 20,000 tons, but only 8,134 tons were left when Nixon announced the suspension of exchange. Although it is stipulated that the issuance of US dollar banknotes exceeding the amount of gold reserves is prohibited, the reduction of gold has lost balance with the issuance of US dollars, and the exchange with gold can no longer be guaranteed.

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The era when the price of gold is determined by supply and demand

The Nixon shock disengaged the linkage between gold and the U.S. dollar, and the price of gold became freely determined by supply and demand. At the same time, after the Nixon shock, the “Smithsonian Agreement” was reached in response to the currencies of various countries, and the foreign exchange market was re-adjusted to maintain a fixed exchange rate system, but ended in failure. Since 1973, it has changed to a floating exchange rate, and the exchange rate is determined according to the economic strength of each country and the currency supply and demand situation until today.

Buying gold in troubled times causes the price of gold to soar

After the price of gold becomes determined by the supply and demand situation, gold is largely affected by world economic trends. Wars, economic prosperity, and economic depression will all lead to changes in the price of gold. After entering the 21st century, the general anxiety about the world economy has caused the price of gold to rise.

In recent years, the relaxation of financial policies in various countries has been the most important factor in the rise of the gold market. The relaxation of finance means that central banks of various countries must continuously provide funds. The real interest rate is negative, and the capital originally used for equipment investment and consumption flows into the gold market. With the advancement of the relaxation of financial policies, the price of gold continues to rise. In addition, excessive liquidity may become a hotbed of inflation, pushing the rush to buy gold to a climax.

2020 - In order to stimulate the economy hit by the pandemic, the Federal Reserve Commission (FED) restarted quantitative easing (QE), hoping to release a large amount of funds to activate the market, and the result of a large number of bond purchases has also depressed bond yields and increased investor interest towards gold and have the willingness to hold gold under uncertain circumstances. Therefore, the demand for hedging from the impact of the pandemic, the weakening of confidence in the US dollar, and the continued low interest environment of the Federal Reserve will increase the willingness of investors to hold gold, which has become a boost to the international gold price in the post-pandemic era.

Why is gold attracting attention today?

After entering the 21st century, the price of gold has climbed all the way. Throughout the ages, gold jewelry has always been a symbol of wealth, and gold has also been used as currency. After entering the era of paper money, gold once retreated to a supporting role, but now it has returned to the world with its unparalleled sense of existence.

As an asset, the value of gold skyrocketed

Speaking of where does money exist? Everyone will think of banks first, right? However, bank interest rates are relatively low, and it is still difficult to increase value through bank deposits.

What about stocks? Although higher than the bank interest rate, there is also a risk of depreciation. Judging from the data of the past 20 years, there have been periods of high rises and periods of lows.

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Unlike currency, gold is stateless. Unlike printed banknotes, gold does exist as a “physical object”. From ancient times to the present, when a crisis is sensed, people will focus on gold and buy in large quantities. Perhaps it lacks romance, but as an asset to keep its value just in case, gold has attracted much attention.

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Mistrust in currencies causes funds to flood into gold

Especially around 2010 and in recent years, people’s trust in the base currency, the US dollar, has declined. The euro crisis has caused uneasiness on the European economy, and the stock prices of various countries have fallen. Investors are extremely worried about existing financial products.

However, gold does not bear the label risk of “currency, bonds, stocks issued by a certain company in a certain country”, which speeds up the flow of funds to gold. In addition, in order to cope with the economic crisis, governments and financial institutions of various countries have adopted financial relaxation policies, which have actually diluted the value of financial assets and increased the value of gold as a “physical object”.

This distrust of currency has led to a steady flow of funds to gold. After entering the 21st century, gold, which has been singing all the way, has continued to surge in value due to explosive purchases.

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AUVESTA is a famous German gold company that has been operating since 2009, specializing in the purchase, sale and storage of physical gold, silver, platinum and palladium.