Dear Editor,
The price of gold recently passed the US$2,000 mark per oz and is expected to continue rising even reaching US$3,000 in the midst of the COVID-19 crisis and the global recession. Historically, gold had been a safe haven for investors during crises ever since the First World War. Gold is the most popular precious metal and has not lost its lustre for safety, security and a rate of return.
Investors and Central Banks around the world hold gold as a store of value and to hedge against turbulence be it economic, political or a currency crisis. The current economic uncertainty will see gold continuing as a main store of value as the global economy grapples with the COVID-19 crisis. The price of gold unlike the value of paper or fiat currencies cannot easily be manipulated by economic agents. Gold is therefore the most stable commodity money.
The last global financial crisis (2008) saw the plummeting of Wall Street wealth. Since then gold has regained the special traction that symbolized it as a safe store of value. The coveted value or confidence factor is preserved by the fact that it is nobody’s liability. The history of gold as one of the earliest forms of money, the gold standard, the large amount of gold reserves accumulated by Central Banks, its low correlation with the other metal prices and its price relationship with fiat currencies is a manifestation of gold behaving more like money than a commodity. Despite all major currency pegs being removed from the gold standard with last being the Swiss Franc in early 2000, Central Banks still hold a major part of their reserves in gold. European Central Banks hold on average 58 percent of their reserves in gold followed by the US Fed Reserve Bank at 50 percent. In addition, international organizations like the IMF hold nearly 20 percent of the world’s gold output.
The high demand for gold is also propelled by the jewellery and industrial sector. India’s jewellery subsector represents 27 percent of this demand and is the largest market for this segment of demand followed by China and the US. Persons who had stored up their wealth in jewellery would gain more in real value terms than if the corresponding investments were made on financial products on Wall Street during the last decade.
Gold prices also benefited from the advent of the Exchange Traded Products (ETP’s) in the market. The ETP’s allow investors to purchase gold bullion as a share of stock. These shares are traded on major stock markets. The ETP’s trade gold while profiting from arbitrage in the stock market there by creating an element of speculation in gold prices. In the contemporary era, gold has regained its “Midas touch” and has fascinated investors and savers alike around the world. Savers see gold as a hedge against the depreciation of paper currencies and inflation. Investment in gold carries little opportunity cost because of low interest rates and yield earned on investments in the money market. In the past, there has been a correlation between the high price of gold and a weakened US dollar.
Large institutional savers like pension, social security and health funds try to find safe havens for their investments especially when faced with daily headlines like COVID-19, sovereign debt crises or imminent global recession. These fund managers being risk averse bet on a safe haven such as gold for protection of value.
Gold is now being more utilized as a medium of exchange and a store of value, as banks now offer clients gold-based accounts. The SWIFT international payments messaging system now allows payments via gold. Investors predict that the gold price can rise to US$3,000 per ounce, and with the global economy still in recession it is hard not to be optimistic about the future price of gold.
Gold was Guyana’s main export last year estimated at US$876.6 million an increase of 14.3 percent over the previous year despite being hamstrung by some rigid regulations by the APNU+AFC government. Gold production increased due to increased declaration by the small and medium size miners by 23.6% while Guyana Goldfields’ and Troy Resources’ production fell by 26.6%. However, in the current era with a more responsive approach by the PPP/C towards this sector and a projected price range that is expected to double, gold exports should be phenomenal.
Yours faithfully,
Rajendra Rampersaud
