Gold: Is It a Good Investment - Literature review Example

Gold: Is it a good investment? Why did we abandon the gold standard? Gold as a currency has a history that s back to many centuries ago, when no monetary currency was minted at the time. However, with the civilization and advancement in technology and the state of the economies globally, the gold standard was done away with, and in its place, paper and coin money was printed to act as the medium of exchange. However, many centuries later, and at a time when the world has advanced greatly both in technology and economic transactions, there is the feeling that reverting back to the ancient gold standard currency could offer the economies a reprieve, especially as related to instilling fiscal discipline both on the individuals and households, as well as on the government spending (Bordo, 47). The question that arises then is; why was the gold standard vacated globally in the first place? What advantages were being sought in the monetary currency that the gold standard system did not offer? When measured in terms of the monetary currency, the same wages that the Roman soldiers received past 5-6 centuries ago is practically the same with what the USA army officers receive today (Mankiw, n.p.). This is because, when estimated in terms of the value received, the Roman regiments back then received an annual compensation of 40.9 ounces of gold, while the United States Army currently receives monetary value that when estimated in terms of the gold standard, is equivalent to 38.9 ounces of gold (Mankiw, n.p.). This example simply seeks to show that the wage inflation rate when assessed in terms of the gold standard is close to zero for the last 6 centuries, but when the same is measured in terms of the current monetary value system, the wage inflation rate for the last 6 centuries must have increased by hundreds of percentages. Thus, simply put, the gold standard was an effective way of ensuring to curb the inflation rate that is caused by the wages increase over time, such that the same amount of gold currency can remain in circulation for hundreds of years without the need to increase its volume, which is different from the case in the monetary currency, which requires minting of new currency very regularly in order to meet the demand for high currency within the economies (Bryan, 72). Despite this perceived advantage that is offered by the gold standard system, it has been noted that the volatility of the price of gold is as high as that of the stocks in the stock market. Thus, according to a recent N.B.E.R. paper, when considering the price of gold since the removal of the gold standard system in the USA economy, the deviation of the gold’s price has averaged 50% more than stocks between 1975 to 2011 (Mankiw, n.p.). The same can be seen in the history of the gold prices in London, which has indicated that there has been a huge fluctuation in the gold prices since 1700 to 2011, where the price of gold per an ounce has fluctuated from $5,600 in 1702 to $1,800 in 2011 (CPM Group, n.p.). Source: CMP Grpoup: http://redcatsboards.yuku.com/reply/48547/--return--gold-standard--two-years-says-Euro-Pacific-Capital#.VGIfsKASTGg In addition, the promise of price stability offered by the gold standard system is the future promise that prices will finally stabilize in the long-run, and that the inflation rates will be sustained at very low levels henceforth. This is a different case with the true nature of the volatility of prices in the short run, where the prices continues to vary at very violent rates, based on the changes in the stock market, as well as the volume of gold that is held within the economy (Bryan, 77). This simply means that the perceived advantage of price stability that comes with returning to the gold standard system may not benefit the current generation, but instead cause an economic havoc arising from the violent shifts in the prices. Another major issue associated with the gold standard system is the fact that; while the system is effective in dealing with the issue of inflation, it is totally problematic in handling the deflation aspect, compared to the current monetary and fiscal system that are based on the money currency (Ögren, 102). This still means that a return to the gold standard system will not be entirely safe for the running of the economy, owing to the fact that the economy does not only depend on the inflation aspect, but also on the deflation concept. Source: Gold Price Estimate 2010 Available at: http://goldprice.org/ Nevertheless, the question that we need to ask at this point is whether the mere inflation control advantage offered by the gold standard system is sufficient to cover all the other economic functions that are associated with the fiscal and monetary policy, and still offer the same advantages (Rockwell, 55). The answer to this question affirms to the negative, owing to the fact that statistics have shown that the appreciation in value of gold between 1836 to 2011 is only 1.1% compared to the average appreciation in value of other financial market tools such as the long-term bonds and stocks, which have increased by an average of 2.9% and 7.4% for the period 1836 to 2011 (Mankiw, n.p.). This means that the returns in the long run for investing in the gold standard system is very minimal, compared to the investment returns obtained from the investments in the monetary systems. Therefore, while the return to the gold standard system would be a sure way of controlling the levels of inflation within the economy, it would adversely affect the investors, owing to the fact that they would earn very little from their investments in gold (Bordo, 49). This follows that investment in gold is not an attractive option for the investors, as it would render them less wealthy over time. Therefore, the unattractiveness of investing in gold is the fact that its returns in the long run are meager, while its volatility is very high. This can be exemplified clearly by the volatility of the gold price in the 21st century, where the price of gold has changed from $500 per an ounce of gold in 2005 to $1800 per ounce in 2011 (Mankiw, n.p.). This becomes one major reason why the investors do not perceive either the return of the gold system or the investment in gold as an attractive proposition. Gold Trends: Gold Prices in United States of America in Previous Days Trends Prev close 1 month January 1st 52 weeks Ounce US$ 0.20%    -5.60%    -3.97%    -10.13%    US $ Yesterday 30 days Jan 1st 52 wk Yr high Yr low 1 oz 1,177.81   1,222.25   1,201.50   1,283.75   1,379.00   1,144.50   1 kg 37,867.47   39,296.25   38,629.12   41,273.52   44,335.88   36,796.53   1 gr 37.87   39.30   38.63   41.27   44.34   36.80   Source: 24 Hour Gold Watch Available at: http://www.24hgold.com/english/gold_silver_prices_charts.aspx?money=USD The most important thing that the investors should however consider, is the fact that the risk associated with diversification in the gold portfolio is lower when compared to the investment portfolio risk for stocks and bonds, which then makes gold an attractive investment proposition for the investors, but only when applied as an investment portfolio combined with other financial market tools such as the stocks and the bonds (Butler, 13). The other advantage associated with investing in gold is the fact that the cost of investment in gold is minimal, while at the same the process is easy, when compared to the costs and bureaucratic processes of investing in other portfolio such as the bonds and the stocks (Lehrman, 36). Thus, there is no doubt that it would be an advantage for investors to invest in gold, though as a part of combined portfolio. However, the question of the practicality of this proposition cannot escape the attention of the economists, owing to the fact that according to the According to the World Gold Council, there are only 170,000 metric tons of gold globally (GoldStandard.org, n.p.). Further, in the USA, the amount of gold that is held according to the 2012 statistics is 261.5 million ounces of gold, which translates into $434.6 billion, when estimated at a monetary value of $1,662, which was the value of one ounce of gold by December 2012 (GoldStandard.org, n.p.). The problem that is generated by these statistics is how plausible and practical the investment in gold can be for the USA investors, when the total amount of investments when measured in monetary terms is in hundreds of trillions of US dollars, yet the available gold for investing in is a mere $434.6 billion worth (GoldStandard.org, n.p.). This reality therefore means that there would certainly arise a practical problem in the establishment of a gold system to replace the monetary currency system, due to the fact that there is an acute shortage of gold to be equated with the value of investments in the economy, when measured in monetary terms. The current USA national debt runs at $16.2 trillion, according to the 2013 National Bureau of Statistics data, which means that the existing gold in the USA, whose value is only $434.6 would do very little to clear the national debt owed by the USA (Brecht, n.p.). This is because, if all the gold within the USA is sold at the existing market value, it would only cover 2.7% of the total national debt that the country owes. However, if the country would seek to cover the total debt of $162 trillion that is owed, then one ounce of gold should be valued at $62,475, which in turn will be a major inflationary disaster (GoldStandard.org, n.p.). Thus, the transition from to the gold standard appears a great practical challenge. Works Cited Bordo, Michael D. The Gold Standard and Related Regimes: Collected Essays. Cambridge [England: Cambridge University Press, 1999. Internet resource. Bryan, Steven. The Gold Standard at the Turn of the Twentieth Century: Rising Powers, Global Money, and the Age of Empire. New York: Columbia University Press, 2010. Print. Brecht, Kira. “The Gold Standard: A Panacea or More Malaise?”, July 2013. Available at: http://redcatsboards.yuku.com/reply/48547/--return--gold-standard--two-years-says-Euro-Pacific-Capital#.VGIfsKASTGg Butler, John. The Golden Revolution: How to Prepare for the Coming Global Gold Standard. Hoboken, N.J: Wiley, 2012. Print. CPM Group. “The Gold Constant.” Available at: http://redcatsboards.yuku.com/reply/48547/--return--gold-standard--two-years-says-Euro-Pacific-Capital#.VGIfsKASTGg GoldStandard.org. “Should the United States Return to a Gold Standard?”, (n.d) Available at: http://gold-standard.procon.org/ Lehrman, Lewis E. The True Gold Standard: A Monetary Reform Plan Without Official Reserve Currencies: How We Get from Here to There. S.l.: Lehrman Institute, 2011. Print. Mankiw, Gregory. Budging (Just a Little) on Investing in Gold. The New York Times, July 27, 2013. Available at: http://www.nytimes.com/2013/07/28/business/budging-just-a-little-on-investing-in-gold.html?_r=0 Ögren, Anders. The Gold Standard Peripheries: Monetary Policy, Adjustment and Flexibility in a Global Setting. New York: Palgrave Macmillan, 2011. Print. Rockwell, Llewellyn H. The Gold Standard: Perspectives in the Austrian School. Auburn, Ala: Ludwig von Mises Institute, Auburn University, 1992. Print. Read More