Gold: What is its economic significance, and what factors control its prices?
Gold: What is its economic significance, and what factors control its prices?
It’s always like gold is of great importance to humans from the past. Besides its use in jewelry and decoration, that precious metal is the wealth individuals and States depend on and is of great importance to the economy. It has a global price exchange that changes every day. What is the economic importance of gold, and what are the most visible factors that lead to its rising or falling prices?
Gold rule
Gold has long been a significant element in the global monetary system. In 550 B.C., the first gold coins were made on the orders of Crusas, King of Lydia (currently in Turkey). Gold was used for currency manufacture in many countries before the conversion to paper currency.
But even those coins maintained a strong connection with gold through what is known as the rule of gold: a monetary system based on using gold as a base or criterion for determining the value of a nation’s paper currency by linking it to a fixed amount of gold. Local currencies were freely converted into a specified quantity of gold after a fixed price had been adopted to sell and purchase gold.
Under that rule, anyone could provide paper coins to the government and demand the equivalent of gold for them.
Britain invented the gold rule in 1821. Before that, silver was the world’s main monetary metal. About 50 years later, in the 1970s, that system was adopted by many other countries, such as France, Germany, the United States, and others. One reason for the proliferation of North America was the discovery of large amounts of gold, which made that precious metal highly available. Under that rule, unlimited quantities of gold were sold and purchased.
It continued until the outbreak of the First World War in 1914. That war had seen a return to paper coins that could not be converted to gold, and most countries had imposed restrictions on exports of yellow metal. Although the gold base was briefly restored, it collapsed during what was known as the Great Depression in the 1930s. The gold base was partially restored in some countries shortly after the end of World War II. Still, another system, the “stabilization” system, has gradually begun to replace it, with the United States deciding to set a lower dollar price for gold used by international central banks for sale and purchase.
In 1971, the decline in the United States gold reserve and the high balance-of-payments deficit led to a decision to abolish the gold rule. Since then, the international monetary system has depended on the dollar and other paper currencies.
According to the British Knowledge Service, one of the Golden Rule system’s advantages is that it reduces Governments’ or banks’ capacity to cause price inflation through over-issuance of paper currency and creates stability in international trade by providing a consistent pattern of exchange rates.
Its disadvantages include the need to provide more flexibility in the provision of money because the quantities of newly mined gold are not closely linked to the needs of the growing international economy for the equivalent of cash. Some States may be unable to separate their economies from the recession or inflation the world is experiencing.
Although gold is no longer directly used in the international monetary system, central banks and governments worldwide still hold large amounts to safeguard against economic instability since gold’s performance is less volatile than other individual goods, commercial shares, and currencies.
“Gold is a safe investment for companies, but when stock prices, bonds, and real estate are refreshing and stable, investors move from the safe gold sanctuary to investing in high returns – the shares of Silicon Valley companies in the United States, or oil companies in the Gulf, for example. Gold preserves wealth but does not add much to it if a country &’s economic performance is good.”
Gold is also a safe and sound investment for individuals and families in many countries—for example, in the Arab region and India—where it is used for both decorations and savings during difficult times.
There is a difference in the consumption of gold between industrialized and non-industrial nations. For example, industrial consumption is superior to domestic consumption in the United States and European countries, as Dr. Says. Gold is used for many industrial purposes, such as manufacturing computers, smartphones, medical equipment, space exploration equipment, etc. In Arab countries, for example, “home consumption is higher than industrial consumption, where gold is used for weddings and gifts and is considered to be a small fortune and a haven for saving, especially for women.”
