🪙 Time Machine: Sona Kitna Sona Hai?
History repeats itself, and fundamental principles stand strong despite changing circumstances. Today, hop on ReadOn's time machine and explore how gold has been a safe haven investment over the years
Introducing ReadOn's ‘Time Machine’, where we traverse the corridors of history to make sense of the present. Our time machine isn't made of steel and gears; it's crafted from the threads of narratives that weave together the past, present, and future. This time machine reveals how despite the ever-shifting sands of circumstance, certain fundamental principles stand strong.
History, as they say, has a curious way of echoing through time. The rise and fall of civilizations, economic cycles, and societal shifts seem to follow a rhythm, a pattern that repeats itself with uncanny regularity.
Today, we are going to look at the allure of gold, something that we covered back in 2020.
Whether in the ancient exchange of gold bands symbolizing love or in the modern chaos of economic crises, the fundamental belief in gold as a store of value endures.
Today, amidst the Israel-Hamas war, gold prices have risen again, making it a safe haven during uncertainties of life.
Sit back, and read on as we dive deeper into this shiny yellow metal.
The History of Gold
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. Maybe 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.
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 US stock market was booming and people were investing recklessly.
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.
You see, 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? 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.
The Gold Standard
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.
India’s Love for Gold
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!
Let’s look at how humans have historically favoured gold during bad times:
Gold and stock markets show a negative correlation, implying that when stocks go down, people buy more gold and vice versa.
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.
And so, whenever uncertainty grips our lives, we cling to gold. Be it during the pandemic, or now during the war.
As we conclude our journey in the time machine, the tapestry of time reveals itself as a dynamic interplay between repetition and evolution. While circumstances may swirl and change like the currents of a river, the underlying bedrock of principles remains a steady guide.
Stay tuned for more such voyages through time in ReadOn’s ‘Time Machine’, where the past, present, and future converge to illuminate the enduring essence of the human experience.
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