• Switzerland edition
 
SPONSORED ARTICLE
The history of gold trading

The history of gold trading

Published: 14 Nov 2011 18:34 GMT+01:00
Updated: 14 Nov 2011 18:34 GMT+01:00

Throughout history, gold has been highly valued for coinage, jewellery and the arts. Gold is considered a unique store of value and the symbol of power, strength and wealth. Since April 2001 it has more than quintupled in value, writes Nicolas Shamtanis, Dealing Room Manager at easy-forex.com.

The poet Virgil describes man's underlying lust for gold when he wrote “Auri Sacra Fames” (the accursed thirst for gold). In the 19th century, gold mining expanded around the world with the 1848 California gold rush which helped the settlement of the American West. In 1869, South Africa became a major source of the world’s gold after the discovery of the Witwatersrand basin and the Canadian Yukon gold rush followed in 1896. 

Approximately 65% of all the gold in the world has been mined since 1950 and the finite supply of gold adds to its rarity and attraction.  But how did it all begin?

Various forms of livestock, in particular cattle, and grains were the earliest forms used to settle trades and payment for good goods and services. Cattle are hard to carry in your pocket and grains spoil so an alternative currency was needed. 

In 560 BC, the Greek state of Lydia in Asia Minor introduced the first gold coins. The use of gold coins as currency spread quickly throughout the Mediterranean and Middle East regions. The Romans mined gold extensively and Venice introduced the gold “Ducat” which became the most popular coin in the world for the next 500 years. In 19th century America, a movement to use silver coins and adopt a bimetallic monetary system emerged.  The US Congress did not authorise the printing of paper money until 1861.

For most of the early 20th century, Americans were forbidden to buy or trade gold. In 1946, the Bretton Woods agreement fixed the price of gold at $35 an ounce, creating a gold standard and the US dollar (USD) became backed by gold.  A gold standard is defined as a monetary system in which the standard economic unit of account is a fixed mass of gold. 

The Bretton Woods agreement of fixed exchange rates was implemented to combat deflationary pressures, economic dislocations and currency instability which emerged after World War I and II. Soon after the agreement was signed, the USD became the world’s reserve currency. 

In the following years, there were significant strains on the system of fixed exchange rates as the US balance of payments with the rest of the world grew dramatically. Foreign central banks exercised their gold convertibility rights causing a sharp decline in US gold reserves. 

In 1971, the Bretton Woods system was abandoned when there was no longer enough gold to cover all the paper money in circulation. The USD became a “fiat” currency backed by nothing more than the health of the US economy and the promise of the US government. A fiat currency’s value is based on the issuing authority's promise to pay; not an intrinsic value or extrinsic backing. In 1974, the ban on US ownership of gold bars was lifted and US citizens were allowed to trade gold.

The end of the gold standard ushered in the current system of floating exchange rates. In 1972, the Chicago Mercantile Exchange (CME) launched futures trading in seven currencies and in 1974 the first gold futures contract was traded on the COMEX exchange in New York. The 1980’s experienced a sharp expansion of over-the-counter trading in currencies and gold and the beginning of online trading.

Recently, we have seen gold prices surging to an all-time high as nations, institutions and investors seek safe haven and are using gold as a hedge against inflation and protection against losses in other assets like stocks and bonds and commodities. Investors buying gold are sometimes called “gold bugs.” Gold bugs are also described as a person opposed to the use of fiat currency and are supportive of a return to the gold standard. 

Unlike a fiat currency, money backed by gold cannot be created arbitrarily by government action. The supply of gold is finite and printing of paper limitless. The term gold bug is thought to have been derived from an Edgar Allen Poe poem the “Gold -bug.” In the poem, two adventurers decipher a secret message that leads to a buried treasure.

Since April 2001, the price of gold has more quintupled in value and hit all-time high of $1913.50 in August 2011. The price movement in gold has been quite volatile with prices rising and falling quickly. Investors have shown high levels of interest in trading gold. 

Like foreign currency (forex), trading with gold rates does not require the "physical" purchase or sale of the real material. If you buy forex gold for the price of 1850.97USD, you do not have an ounce of gold that you can hold in your pocket, but you rather have the obligation to buy gold (XAU) at $1850.97. When you close your forex deal, you sell the gold and close your obligation. If you sell it for the price of $1853.00, you have made a profit of $2.03 for every ounce (unit) of gold in your contract.

Rising gold prices can also affect other currencies. Higher gold prices can be especially important to the currencies of major gold-producing countries. Australia, Canada and South Africa are all large producers of gold, so if you believe the price of gold will continue to rise, you can establish trades in the Australian dollar (AUD), the Canadian dollar (CAD) or the South African Rand (ZAR) because those currencies may become stronger. 


It may be wise to keep an eye on gold prices when the international political or economic situation is changing, such as during times when global inflation is rising. If the gold price starts to increase, you might expect it to go higher in the next periods of trading. 

 

Article sponsored by www.easy-forex.com.

Related links:

The Local (news@thelocal.ch)

Don't miss...X
Left Right
Today's headlines
Residents flee as river Emme floods village
Rega helped evacuate homes in the area. Photo: Rega

Residents flee as river Emme floods village

Rega, the Swiss air-ambulance service, evacuated residents of Schangnau in the canton of Bern on Thursday morning as the river Emme broke its banks. READ  

Students race futuristic boats in Lausanne
Students must design a boat that can travel the furthest distance using the least energy. Photo: Hydros

Students race futuristic boats in Lausanne

More than 100 students from six countries are competing in an eco-friendly boat-building competition on Dorigny beach in Lausanne this week. READ  

'Scandalous' car park delays rile festivalgoers
Stromae performed on Wednesday night. Photo: Paleo/Lionel Flusin

'Scandalous' car park delays rile festivalgoers

Festivalgoers attending Nyon’s Paléo festival have reacted in anger after bad weather created long delays to exit car parks on Wednesday night. READ  

Monaco grabs quarter- final place in Gstaad
The Swiss Open at Gstaad takes place at 1,010m. Photo: Alain Grosclaude/AFP

Monaco grabs quarter- final place in Gstaad

Juan Monaco held his nerve in a tight final set to upset third seed Guillermo Garcia-Lopez 6-2, 2-6, 6-4 on Wednesday for a second consecutive place in a quarter-final at the Swiss Open. READ  

UBS 'to pay French $1.5 billion over tax evasion'
Photo: Martin Abegglen

UBS 'to pay French $1.5 billion over tax evasion'

Swiss bank UBS was on Wednesday charged with tax fraud in Paris for allegedly helping rich French clients to hide money in Switzerland, a judicial source said. READ  

Renewable energy activities hit ABB results
Photo: Roland Zh

Renewable energy activities hit ABB results

Swiss-Swedish engineering group ABB said its profits fell in the second quarter, pulled down by renewable energy activities, despite strong orders, particularly in North America. READ  

Red Cross officially declares Ukraine civil war

The Geneva-based International Committee of the Red Cross said Wednesday that it considered Ukraine to be in a state of civil war, urging both sides to respect the laws of conflict as civilians bear the brunt. READ  

Israel's actions 'may be war crimes': Pillay
Navi Pillay. Photo: UNHCR

Israel's actions 'may be war crimes': Pillay

Israel's military actions in the Gaza Strip could amount to war crimes, UN rights chief Navi Pillay said in Geneva on Wednesday, while also condemning indiscriminate rocket attacks by Palestinian militants Hamas. READ  

Wheelchair user killed in station by SBB train
Photo: Sebastian Widmann/AFP/Getty Images

Wheelchair user killed in station by SBB train

An investigation is under way into the death of a man in a wheelchair who was killed on Tuesday by a Swiss Federal Railways (SBB) train travelling through the Roggwil-Wynau train station in the canton of Bern. READ  

Geneva bank CBH snaps up Portuguese interests
Photo: (Detail) AFP

Geneva bank CBH snaps up Portuguese interests

The main shareholder of troubled Banco Espirito Santo (BES) was placed in receivership on Tuesday as the parent group announced it has sold off the bulk of its Swiss-based activities to Compagnie Bancaire Helvétique, a Geneva-based bank. READ  

RECEIVE OUR NEWSLETTER AND ALERTS
Sport
Video of Bern football player's spectacular own goal goes global
Tech
Switzerland stays on top of innovation rankings for fourth year
National
Roger Federer and Lindsey Vonn play tennis at Jungfraujoch (VIDEOS)
Business & Money
Competition commission launches probe into Swiss car leasing 'fiddle'
Health
Down's syndrome cases in Switzerland more than double
National
American family files hefty lawsuit over deadly Swiss balloon crash
Features
Graubünden's panoramic Bernina Express celebrates rail history
National
Study rates Zurich as world's fifth most expensive city for expats
National
Swiss-based human brain project directors hit back at research critics
Business & Money
Switzerland gets the edge on EU with China free trade agreement
National
Entries for new Swiss national anthem competition swell over 200
National
Zurich-based helicopter firm denies role in Schumacher medical leak
Culture
Montreux Jazz Festival debuts live internet streaming of concerts
Features
Tour of Bern’s historic fountains tells story of Switzerland's capital
National
Swiss media lament football team's 'cruel' and 'bitter' defeat
International
The Local expands its reach with the launch of new website in Denmark
Sport
Jubilant press hails hat-trick hero Shaqiri as 'Swiss Messi'
National
New website study reveals inequality in Swiss disposable income
Travel
Switzerland’s largest ski area 4-Vallées breaks up over lift dispute
National
VIDEO: Zurich Zoo launches contest to name newborn baby elephant
Business & Money
CEO-to-worker pay gap grows at biggest Swiss firms: union study
Culture
VIDEO: Swiss performance artist plans naked stroll at Art Basel
National
Zurich's new rail line and underground station open 'without a hitch'
Latest news from The Local in Austria

More news from Austria at thelocal.at

Latest news from The Local in Germany

More news from Germany at thelocal.de

Latest news from The Local in Denmark

More news from Denmark at thelocal.dk

Latest news from The Local in Spain

More news from Spain at thelocal.es

Latest news from The Local in France

More news from France at thelocal.fr

Latest news from The Local in Italy

More news from Italy at thelocal.it

Latest news from The Local in Norway

More news from Norway at thelocal.no

Latest news from The Local in Sweden

More news from Sweden at thelocal.se

2,193
jobs available