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Is Gold Still a Safe Haven Investment? A Look at the History and Future of Gold

Gold was originally just a metal. Due to its scarcity and the role of human history and culture, gold has become a symbol of human wealth and value. In fact, gold has transcended political systems, ethnic cultures, and levels of economic development. It is like a golden bloodline that runs throughout the entire history of mankind. From ancient Egypt, Mayan civilization, ancient Babylon to China, gold has been preserved for a long time as a symbol of wealth and carries human culture and art.

But nowadays, everyone has different opinions on the value of gold. “Stock God” Buffett believes that gold is a “chicken that cannot lay eggs” and has little investment value. The People’s Bank of China has increased its gold reserves for the 16th consecutive month, and ordinary people in the country are also ready to “buy gold.”

In fact, if we just put it at one point in time, everyone’s judgment on gold seems to be correct. But if you look past the fog of history, you will find that gold prices have certain cyclical fluctuations, and the instability of world geopolitics will also exacerbate price fluctuations in the gold market.
The multiple attributes of gold and the three eras of monetary systems

In “Critique of Political Economy”, Marx made a famous assertion: Gold and silver are naturally not money, money is naturally gold and silver. In Chapter 3 of Volume 1 of “Capital”, Marx further defined the basic function of gold. Gold can “express the price of commodities as quantities of the same name, making them qualitatively equal and quantitatively comparable to each other.” .In this way it becomes the general measure of value.”

It’s not easy to figure out how gold is priced. Gold has multiple attributes as a commodity, currency and investment hedging. Because of this, the formation mechanism of gold prices is more complicated than that of ordinary commodities. It is not only a simple commodity supply and demand determination mechanism, but also takes into account changes in the global monetary system, changes in global monetary policies, and the demand for investment and speculation in the gold market. Variety.

In the two eras of the gold standard system and the Bretton Woods system, gold directly served as currency or quasi-currency, with stable prices and little fluctuation.

Hu Jie, a professor of practice at the Shanghai Advanced Institute of Finance at Shanghai Jiao Tong University, told Xinmin Weekly that gold as a commodity has two main uses: one is to make jewelry and handicrafts, which are the most common gold jewelry for ordinary people; the other is in electronics In the manufacturing field, because components and circuits are required to have good stability, conductivity and corrosion resistance, only gold and its alloys can meet such stringent requirements.

The participation of gold in the international monetary system has mainly occurred in the past 200 years.

So far, the international monetary system has gone through three eras: the gold standard system, the Bretton Woods system and the Jamaican system.

Gold has been important to currency circulation since the invention of money, but some fundamental changes occurred in the 19th century: In order to ensure public confidence in the value of bank notes, banks must store a sufficient amount of gold. In modern society, the earliest systematic gold standard (linking the value of paper currency to gold) appeared in the United Kingdom. As the earliest developed capitalist country in the world, it adopted the gold standard system around 1821. Later, other countries adopted the gold standard one after another. system.

In July 1944, representatives of major Western countries held the United Nations International Monetary and Financial Conference in Bretton Woods, New Hampshire, USA. At this meeting, an international monetary system centered on the US dollar was established. Because this conference was held at Bretton Woods, it was called the “Bretton Woods System.”

In the Bretton Woods system, the U.S. dollar is directly linked to gold: Countries around the world can exchange 35 U.S. dollars for 1 ounce of gold with the United States, and the currencies of various countries in the world are pegged to the U.S. dollar (fixed exchange rate), which is the exchange of currencies of various countries with the U.S. dollar. An agreement was made after comparing prices. Its essence is to establish an international monetary system centered on the US dollar. The operation of the Bretton Woods monetary system is closely related to the credibility and status of the US dollar.

The reason why we changed from the gold standard to the Bretton Woods system was because after the world economic crisis and World War II in the 1930s, the United States ascended to the status of the leader of the capitalist world, and the U.S. dollar was very strong; moreover, at that time, the United States owned 3 /4 gold reserves and strong military strength.

It is worth mentioning that in the two eras of the gold standard system and the Bretton Woods system, gold directly acted as currency or quasi-currency, with stable prices and little fluctuation.

Data shows that from 1833 to 1932, the international gold price fluctuated between US$20.62 and US$20.69 per ounce, and from 1934 to 1968, the international gold price was approximately US$35 per ounce. After the formation of the Jamaican system, the international gold price was truly “unbound” and began to experience “big ups and downs”.

In 1968, an unprecedentedly serious dollar crisis broke out in the United States. At that time, the United States was deeply involved in the Vietnam War, and people around the world had strong protests and anti-war sentiments. In more than half a month, US$1.4 billion has flowed out of U.S. gold reserves. In August 1971, under the impact of the first dollar crisis, President Nixon announced that he would stop fulfilling the obligations of foreign governments or central banks to exchange dollars for gold in the United States, and the Bretton Woods system subsequently disintegrated. In December of the same year, the price of gold rose from $35 to $38 per ounce. In February 1973, affected by the second dollar crisis, the price of gold rose to $42.22 per ounce.

The “Jamaica Agreement” signed in January 1976 stipulates that the gold content of each country’s currency will no longer be specified, and gold will no longer be used as the standard for currency parity valuation. This started the process of demonetization of gold, which became known as the era of the Jamaican System. In this system, the long-suppressed consumer demand for gold has been released, and international gold prices have risen sharply in the short term.

In 1979, the international situation was violently turbulent, with incidents such as the U.S. hostage crisis in Iran and the Soviet Union sending troops to Afghanistan. Under the combined effect of these factors, on January 18, 1980, the international gold price reached US$850 per ounce, setting a record high in the international gold market at that time. In the 12 years from 1968 to 1980, the international gold price rose by an average of more than 30% per year.

On January 18, 1980, the international gold price reached US$850 per ounce, setting a record high in the international gold market at that time. In the 12 years from 1968 to 1980, the international gold price rose by an average of more than 30% per year.

In the second half of the 1980s, the world economy maintained low inflation and rapid growth. The value preservation and hedging role of gold declined, and the price of gold also fell accordingly. Under the Jamaican system, the role of gold in international clearing and settlement has also declined. Central banks in some countries have begun to reduce gold reserves. The behavior of central banks selling gold has also pushed the price of gold lower.

In short, after the international gold price soared to a record high in January 1980, it has been on a downward trend. In early 2001, the international gold price fell to US$255.95 per ounce. This stage is also known as the “20-year bear market” of international gold.

After the “9·11” incident in the United States in 2001, changes in the international political situation caused gold’s value-preserving and hedging functions to be valued again. The international gold market ended its 20-year bear market and entered an upward channel.

In December 2004, the international gold price rose to US$456.75 per ounce. In the second half of 2005, the price of gold per ounce continuously exceeded US$500, US$600 and US$700. In May 2006, the price of gold rose to US$730 per ounce. In 2007, gold futures prices rose by 31%. After the financial crisis broke out in 2008, international gold prices rose rapidly until the highest point in 2012 exceeded US$1,900 per ounce.

In Hu Jie’s view, every surge in gold is related to “fear.” “Whether it was 1980 or 2008, this gold cycle was driven by fear and a growing distrust of traditional central banks.”

In China, there is a saying that “buy gold in troubled times”. It is not difficult to find that this rising gold price cycle began with the COVID-19 epidemic. The epidemic has led to an overall recession in the global economy. Because people are uncertain about their future expectations, they choose to invest in gold in order to preserve the value of their property.

The fluctuation pattern of gold price

The long-term price of gold is determined by the supply and demand relationship in the international gold market, while the short-term price will be affected by many economic and political factors, such as inflation rate, US dollar exchange rate, world economic situation and international political situation, etc. Generally speaking, when inflationary pressure increases or the US dollar depreciates, when uncertainties in the world economy increase or the international situation is turbulent, the price of gold will rise, and vice versa.

Among them, changes in the value of the US dollar are the most important factor affecting gold prices. In the international market, gold transactions are priced in U.S. dollars. A sharp depreciation of the U.S. dollar will directly promote a sharp increase in international gold prices. The international financial crisis that originated in the United States in 2008 directly affected the international community’s confidence in the U.S. financial system and the U.S. dollar. Coupled with the Federal Reserve’s continuous quantitative easing policy, the U.S. dollar continued to weaken, and the international gold price continued to rise.

Inflation is another important factor driving gold prices higher. Gold has long been viewed as a hedge against inflation. From 1974 to 1975, and from 1978 to 1980, due to very serious global inflation, the relative depreciation of the currencies of major countries shook people’s confidence in holding currencies, which set off a rush to buy gold. , the price of gold rose rapidly. During this period, gold holders successfully guarded against the risk of inflation.

Changes in the supply and demand relationship in the gold market are the underlying reasons that affect gold prices. India was once the world’s largest gold consumer (the latest data is China), and South Africa was the world’s largest gold producer. Changes in demand and supply in these countries will have a certain impact on the direction of international gold prices. In addition, as uncertainty in the world economy increases, more investors will choose to buy gold as a safe haven, thereby increasing demand and raising gold prices. After the international financial crisis in 2008, people’s expectations for the U.S. economic outlook generally tended to be pessimistic, and the global economy was therefore full of uncertainty. Gold attracted many investors because of its hedging and value-preserving properties. In addition, world geopolitical instability will also exacerbate gold market price fluctuations.

In addition to the above macro or microeconomic factors, the factors that affect gold prices do not rule out “human operation” reasons. After gold has achieved market-based pricing, investors have become increasingly diversified and have various investment methods. Price fluctuations are the best opportunity for professional investors to make profits.

For example, the historical price of US$850 in 1980 is not a true reflection of the value of gold, but can only be said to be a “bubble price” or “false price”. This price deviates from the market rules to a certain extent and is full of speculation. . In 1980, it took 20 years for the price of gold to fall back from its historical high of $850, and the adjustment range once exceeded 70%. In the past 20 years, the global economy has maintained a rapid development trend, and the actual supply of money and commodity price levels have continued to increase. This is in sharp contrast to gold prices, which have been depressed for 20 years.

In 2010, when the price of gold exceeded US$1,300, international investment tycoon George Soros said that “gold is a super bubble.” So, although the current soaring price of gold is due to people’s blind pursuit of it due to financial panic, it cannot be ruled out that it is “manipulated” by professional investors.

In April 2013, Wall Street financial giants shorted gold. The price of gold fell by 20% in one day, and the world was in an uproar. Unexpectedly, a group of “Chinese aunts”, mainly “Chinese aunts”, appeared on the way and swept away gold. Instead, the international gold price hit the largest single-day increase in 2013, which simply stunned Wall Street. The Wall Street Journal even coined the English word “dama” to describe “Chinese aunts” – what this reflects is the strong purchasing power and desire for gold. Of course, the strength of Chinese aunts is far from being comparable to these financial giants. After that, the price of gold continued to plummet, and the Chinese aunts stayed in one position for seven years.

At the moment, speculators are aggressively increasing their holdings of gold futures and options. Many institutions have warned that the increase in gold prices is too exaggerated and is currently mainly driven by short-term speculative funds.

The price of gold is largely a matter of people’s psychological expectations. The current global economic situation is turbulent, and the commodity market is facing the superposition of multiple variables such as the Federal Reserve’s interest rate hikes, the Palestinian-Israeli conflict, the Russian-Ukrainian conflict, etc., and the price of gold is unlikely to fall.

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