This article was written in collaboration with State Street Global Advisors. All views expressed in this article are the independent opinion of DollarsAndSense.sg based on our research. DollarsAndSense.sg is not liable for any financial losses that may arise from any transactions and readers are encouraged to do their own due diligence. You can view our full editorial policy here.
Affectionately called the “yellow metal,” gold has been cherished for centuries due to its beauty, rarity, and inherent value. Historically, it has played a crucial role in shaping the economies and cultures of many ancient civilisations, serving both as currency and a symbol of wealth and power.
The History Of Gold
The history of gold can be traced back to 3,600 BC, when it was first smelted in ancient Egypt. By around 2,600 BC, the earliest documented gold jewellery had appeared, and its cultural significance grew.
However, it wasn’t until approximately 560 BC that gold was first used in coinage. This took place in Lydia, which is located in what is now modern-day Turkey. The Lydians developed the process of refining metals and created the world’s first bi-metallic coins, made from a combination of gold and silver. These coins became widely accepted and traded, establishing gold’s role as a currency that could be used as a medium of exchange.
When the Persians conquered Lydia, they adopted gold as the primary metal for their coinage. Following this, both the Ancient Romans and Greeks also began using gold coins as a form of currency, and the ancient state of Chu in China introduced its square gold coins, known as “Ying Yuan (郢爰).”
Throughout the centuries, gold has symbolised affluence, not only in its function as currency but also as a marker of wealth and status. The English language reflects the significance of gold, with expressions like “worth its weight in gold” and “sitting on a gold mine” to emphasise the value of gold.
The Gold Standard
Fast forward to the 18th century and gold had taken its place as the most prominent precious metal as well as a universal form of value. This period marked a significant shift in monetary systems, particularly in the United Kingdom, which (unintentionally) adopted a de facto gold standard in 1717.
The transition occurred when the UK’s Royal Mint, under the direction of Sir Isaac Newton, fixed the price of gold in relation to silver. Unfortunately, Newton set the gold-to-silver ratio too high, effectively overvaluing gold and undervaluing silver. Thus, silver coins, which had previously been the dominant form of currency, were quickly withdrawn from circulation as people hoarded silver for its intrinsic value or exported it. This left only worn-out silver coins and newly-minted gold coins as the primary means of exchange.
Though this move was unintentional, it had long-lasting effects. Paper money in Britain was now backed by gold, inadvertently establishing gold as the de facto currency standard in Britain. This development laid the foundation for what would later become the official gold standard in the UK, which was formally adopted in 1819. Under the gold standard, the British pound was directly tied to a specific quantity of gold, creating a stable and trusted currency that helped fuel the UK’s economic dominance during the 19th century.
Britain’s adoption of the gold standard set a precedent for other nations. As the UK was the world’s largest economic and imperial power at the time, its decision to link currency to gold inspired other countries to do the same. In 1871, Germany was the first major economy to officially adopt the gold standard, and other countries including France and the United States followed suit. This marked the beginning of the international gold standard where many of the world’s leading economies pegged their currencies to gold.
However, this system would eventually come under strain, with the outbreak of World War I in 1914 leading to its decline, as countries suspended gold convertibility to finance their war efforts.
The Fall & (Temporary) Rise Of The Gold Standard
While the conclusion of the First World War led many countries to reconsider the gold standard, it was the UK’s pound sterling and the US Dollar that became the global reserve currencies.
However, the stability of the gold standard was intensified by the Great Depression of 1929 in the US. The chaotic monetary and fiscal picture in the 1930s globally was one of the many catalysts that eventually resulted in the start of World War II in 1939. By the end of the Second World War in 1945, there was a new agreement that was struck by Western powers – named the Bretton Woods Agreement.
The Bretton Woods Agreement was a pivotal moment in shaping the global financial landscape following World War II. Representatives from 44 Allied nations gathered in Bretton Woods, New Hampshire, with the goal of creating a stable and predictable monetary system that would facilitate international trade and economic recovery. It was there that two key institutions were created: the International Monetary Fund (IMF) and the World Bank.
Another key feature of the Bretton Woods system was the introduction of a fixed exchange rate regime, in which currencies were pegged to the U.S. dollar. The U.S. dollar, in turn, was tied to gold at a fixed rate of $35 per ounce, making it the world’s primary reserve currency. This effectively placed the U.S. dollar at the center of global finance, while other currencies remained stable by maintaining their value relative to the dollar.
The Abandonment Of The Gold Standard
The financial and economic difficulties of the 1960s tested the resolve of countries to commit to the gold standard indefinitely.
With a high inflation environment throughout the decade, and with the US also weighed down by the cost of financing the Vietnam War, and other central banks becoming increasingly reluctant to accept US dollars in settlement due to the rising US deficit, U.S. President Richard Nixon terminated the convertibility of the US dollar to gold in 1971 for the central banks of other nations, leading to the collapse of the Bretton Woods system and gold traded freely on the world’s markets.
Gold As An Investment
Though it’s no longer used as a currency, or tied to a currency, gold continue to maintain its allure for investors as it plays a vital role as a hedge against a number of factors – inflation, political uncertainty, market volatility, war, and the devaluation of key currencies.
Gold is also used by central banks to diversify their holdings and to ensure they are not too concentrated in any one particular currency, such as the US dollar or Euro. For investors, gold can be viewed as a safe-haven asset as during periods of economic uncertainty or a loss of confidence in fiat currencies, investors may turn to gold as a way to preserve their wealth.
Beyond its role as an investment, gold is still bought in large amounts in countries like China and India for occasions such as wedding, general well wishes or as a physical investment. Gold also has many industrial uses as it’s used for electronics and dentistry.
Invest In Gold Via ETF
While physical gold can be a strong investment, it comes with challenges such as the need for storage space and security measures, which add logistical complexities and extra costs. Gold ETFs, on the other hand, provide the same exposure to gold without the need to handle or store the physical metal.
The SPDR® Gold Trust (SGX: O87) is the largest physically backed gold ETF in the world. SPDR® Gold Shares are listed on the NYSE and can also be traded on the SGX. By tracking the spot price of gold, the ETF allows investors to participate in the performance of gold, without the burden of owning physical gold bullion or gold coin. It’s a practical and efficient way to gain exposure to the spot price of gold. With the SPDR Gold Shares, investors have the option to invest in U.S. dollar or Singapore dollar-denominated (SGX: GSD) share classes, offering flexibility depending on currency preferences. This is especially beneficial for investors based in Singapore, as they can invest in gold without being exposed to fluctuations in the U.S. dollar.
A key advantage of investing in gold through an ETF is its liquidity. Unlike physical gold, which can be cumbersome to trade, SPDR Gold Shares can be easily bought and sold throughout the day on stock exchanges. The gold that the ETF holds is also allocated which means that each gold bar is specifically identified and allocated to the ETF, kept in physical form in a secure vault and owned by the ETF for the benefit of investors in the ETF.
With rising geopolitical tensions, growing market uncertainty, fiat currency depreciation, and prolonged inflation, SPDR Gold Shares offer a more efficient, hassle-free way to gain exposure to gold, making them an attractive option for portfolio diversification.
Important Disclosure: Sponsored by State Street Global Advisors Singapore Limited (Company Reg. No: 200002719D, regulated by the Monetary Authority of Singapore). This advertisement or publication has not been reviewed by the Monetary Authority of Singapore. All forms of investments carry risks, including the risk of losing all of the invested amount. Such activities may not be suitable for everyone. The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell an investment. It does not take into account any investor’s particular investment objectives or investment horizon. The prospectus in respect of the Singapore offer of the SPDR® Gold Shares (the ‘Shares’) is available at https://www.spdrgoldshares.com/singapore/. The value of Shares may fall or rise. Investors should read the prospectus before deciding whether to purchase Shares. Shares in the Trust are not obligations of, deposits in, or guaranteed by, World Gold Trust Services, LLC, SSGA or any of their affiliates. You may wish to seek advice from a financial adviser before making a commitment to purchase Shares. In the event that you choose not to seek advice from a financial adviser, you should consider whether the Trust is suitable for you. Investors have no right to request the Sponsor to redeem their Shares while the Shares are listed. It is intended that holders of Shares may only deal in their Shares through trading on the SGX-ST. Listing of the Shares on the SGX-ST does not guarantee a liquid market for the Shares.
For more risk and additional information, please visit https://www.ssga.com/sg/en/individual/capabilities/alternatives/gold
Diversification does not ensure a profit or guarantee against loss.
Past performance is not necessarily indicative of the future performance.
Assets may be considered “safe havens” based on investor perception that an asset’s value will hold steady or climb even as the value of other investments drops during times of economic stress. Perceived safe-haven assets are not guaranteed to maintain value at any time.
There are risks associated with investing in Real Assets and the Real Assets sector, including real estate, precious metals and natural resources. Investments can be significantly affected by events relating to these industries.
ETFs trade like stocks, are subject to investment risk and will fluctuate in market value. Changes in exchange rates may have an adverse effect on the value, price, or income of an investment. Further there is no guarantee an ETF will achieve its investment objective.
Brokerage commissions and ETF expenses will reduce returns. Commodities and commodity-index linked securities may be affected by changes in overall market movements, changes in interest rates, and other factors such as weather, disease, embargoes, or political and regulatory developments, as well as trading activity of speculators and arbitrageurs in the underlying commodities. Currency exchange rates between the U.S. dollar and non-U.S. currencies may fluctuate significantly over short periods of time and may cause the value of investment to decline. Frequent trading of ETFs could significantly increase commissions and other costs such that they may offset any savings from low fees or costs. Investing in commodities entails significant risk and is not appropriate for all investors. Commodities investing entails significant risk as commodity prices can be extremely volatile due to wide range of factors. A few such factors include overall market movements, real or perceived inflationary trends, commodity index volatility, international, economic and political changes, change in interest and currency exchange rates.
The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.
The S&P 500® Index is a product of S&P Dow Jones Indices LLC or its affiliates (“S&P DJI”) and have been licensed for use by State Street Global Advisors. S&P®, SPDR®, S&P 500®, US 500 and the 500 are trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”) and has been licensed for use by S&P Dow Jones Indices; and these trademarks have been licensed for use by S&P DJI and sublicensed for certain purposes by State Street Global Advisors. The fund is not sponsored, endorsed, sold or promoted by S&P DJI, Dow Jones, S&P, their respective affiliates, and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of these indices.
The post From Money To Investment: Understand The History Of Gold, And Why It Remains A Valuable Commodity In Modern Finance appeared first on DollarsAndSense.sg.
