Sona Kitna Sona Hai?
Gold is not only a symbol of wealth but also a metaphor. It is also a psychological barometer of market sentiment. How? Read on.
Gold. That shiny yellow metal that humans seem to fancy a lot (sometimes to the point of obsession).
Gold is not only a symbol of wealth but also a metaphor.
It is an honour to receive a gold medal or to be told that you have a heart of gold.
The exchange of gold bands symbolises love and marriage in many societies. Gold is the symbol of the pinnacle of human achievement.
Interestingly, it is also a psychological barometer of market sentiment.
How? Let's see.
First, let us look into the history of this commodity.
There was a time when Aluminium was more valuable than Gold. The kings used to dine in aluminium vessels, and gold vessels were used by the lower class workers (we couldn’t believe this either. I guess that’s what social conditioning does to a person).
Centuries went by, and it dawned upon humans that the barter system could no longer suffice.
And so, the necessity for a common medium of exchange arose.
Around 700 BC, gold coins graduated as the favourite medium of currency.
Why not any other metal, like aluminium, iron, copper or platinum?
Not aluminium, iron or copper, because they corroded over time, and were very light (which did not give a sense of security to the common masses). (Note: Steel wasn’t invented yet).
Not platinum or palladium, because they were too rare, and not many coins could have been circulated in the market.
Thus, gold was the most feasible option.
It was not too abundant, otherwise many people would have started producing it. Also, it wasn’t too rare which helped in maintaining the circulation of enough coins in the market.
It was right in that sweet spot.
Also, once produced, gold stayed. Forever (maybe that’s why lovers give one another gold bands? To symbolise that their love will ‘not corrode’?).
Gold won everybody’s trust and was placed at the pinnacle of all metals. So much so, that any era that’s great becomes a ‘golden’ era. Old is gold? Naah. Gold is old. Very old.
Most of documented history also depicted gold as the favourite medium of exchange.
Wars were waged to own this treasured resource, and the most beautiful prince and princesses were always adorned in gold.
It was repeated so many times to be the best of the best, that ‘gold’ became a norm. An assumed truth. A belief.
And sometimes, belief is greater than the truth.
Leapfrog to the 20th Century
In the 1920s, the U.S. stock market was booming and people were investing recklessly (people still do that. Some things never change).
But, as they say, ‘what goes up, must come down.’
On a fine Thursday morning, all hell broke loose. Wall Street crashed, and the day was termed as Black Thursday (another belief, that black is bad - time to change this? Yes, please).
As the markets crashed, people pulled their money out of stocks and bought gold. Why? Because they trusted gold to hold value. They trusted humans to always seek gold.
A commodity in itself has no intrinsic value. We assign value to it.
Assume that today, the world decides collectively that gold is bad and let’s just ditch it. What will happen to its value? No one wants it now, right? Plus, they are now just heavy blocks of bricks that are hard to store.
Its value will go to 0 (hypothetically).
Gold, like God, is a belief. We trust the person next to us to assign value in gold. To have faith in gold.
It is no longer just a commodity.
Back in the 1900s, all the sovereign nations of the world were experimenting with their own currency. Now, the major function of a currency is to serve as a medium of exchange. Have a common value. How would the individual countries have a common exchange value? What would determine this value? What would the value depend on?
Obviously, gold. The commodity of choice around the world.
And so began the era of the Gold Standard.
The amount of gold you had determined the value of your currency. The more, the merrier.
Eg: Assume the US has a total of $100 printed, backed by 50 tonnes of gold.
Similarly, the UK has £1,000 printed, backed by 50 tonnes of gold.
Hence, $100 = £1,000, or, $1 = £10
That’s how exchange rates were determined.
By the 1960s, the USA owned 75% of the world’s gold. And its economy was growing super fast. It did not have enough gold in its reserves to print more dollars (without gold in your reserves, you couldn’t print money - it was against the agreement signed by top 10 nations of the world).
The US became the world’s gold mafia.
As an economy grows, the number of transactions grow, and the country needs more money in circulation. As gold couldn’t be mined fast enough (takes approx 10 years), the US called for all nations to de-link currency and gold, and mutually decide a standard. It wasn’t in the USA’s favour any more to link gold and other currencies.
What were the other currencies linked to, then? Obviously, the US Dollars.
Today, the scenario is such that gold is denominated in terms of US Dollars, not the other way around.
While the US was successful in de-linking gold and currencies, what it could not de-link was public sentiment towards gold. People just loved the shiny old metal.
Let’s look at it in an Indian context.
We Indians have had a different kind of emotional relationship with gold.
Diwali? Buy gold.
Dhanteras? Gold.
Marriage? Gold.
An idol in the temple? Gold.
Time of crisis? Can’t trust anything or anyone? Gold!
It is eerily similar to the concept of praying to God. In times of crisis, people seek solace in God. When everything is going smooth and great, they focus on other real issues.
Now that people can’t go to temples, they have turned to their old friend, gold.
Let’s look at how humans have historically favoured gold during bad times:
Economists may beat their chest about how markets work on fundamentals, but the truth is that the participants in the market are humans. And we humans run on emotions.
Markets rise and fall as our hopes and dreams rise and fall. While one may try and correlate inflation, interest rate, prices of crude oil and gold, the reality is that gold offers what statistics cannot explain - a sense of peace and calm.
It offers safety and security.
Can’t assign a value to that, can you?
Behind the scenes
We honestly couldn’t get the song “Sona Kitna Sona Hai, Sone Jesa Tera Mann” out of our heads! Sorry if we hooked you to it too :P
Devansh (the deep diver for this piece) believes that it is very difficult to carve out a one-line explanation for why things happen. He loves digging deep and exhausts all possible scenarios to find out why something has happened. He says, “It is difficult to make things easy. Even more difficult to understand the past. Trust me. Stay committed to reading, relationships are anyway confusing, nai?”
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