WHY GOLD IS ALWAYS MONEY
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History of Gold
It was thought that Gold was formed when 2 stars
collided. It is however confirmed that Gold was present in
the dust which formed the Solar System, billions and
billions of years ago. Eventually the earth was formed with
gold in it. Gold is permanent and does not tarnish, rust,
and cannot be destroyed. So, when you touch your gold
ring, you are touching something that was the same
when the Solar System was formed. You are touching
eternity. Physical Gold has no political affiliations, counter
debt liability or unlimited printing risk. We were using it
as a form of money, bartering for tens of thousands of
years before we discovered smelting and the Bronze Age
began. Bulgaria's Varna Gold Treasure is considered the
oldest processed gold in the world and is dated 4400 to
4100 BC.
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Definition of money
- - A medium of exchange
- - A unit of account
- - A store of value
“GOLD IS MONEY. EVERYTHING ELSE IS CREDIT” said the
original John Pierpont Morgan before Congress in 1912.
Even if you buy shares you are buying into future income
streams and bonds are definitely credit on the other side
of the balance sheet. Gold is the most reliable physical
asset with no counterparty risk. Gold also constantly
retains its purchasing power. It buys as much bread as it
did in the time of the Old Testament. There is reference in
the Quran about gold and land. You can buy a Savile Row
suit at the same rate as a toga in Roman times. Some
prices have fallen in gold terms basically because of
improvements in productivity. The oil price in gold
remains about the same for the last 75 years. However, it is
very volatile against the dollar. Ultimately the dollar has
continued to devalue and so have currencies tied to it.
They have lost over 90% of their value over the last 75 years.
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History of Banking
and Gold
There has never been a global reserve currency that did
not start out backed by gold.
The Romans invented banking, cheques and Bills of
Exchange. They have had the Mercantile Law of Europe
for nearly 1800 years. That was always credit. Inflation is
not so much about rising prices, as it is about the falling
value of credit or currency. The Gold Act of 1900, fixed 1
ounce of Gold at US $ 20.67. From 1933 to 1975 it was illegal
in the US, for individuals to hold gold in the physical form.
After World War 2, the dollar to gold parity was fixed in
1958 at US$ 35 per ounce. It is currently valued at US$ 42
per ounce. After huge expenses on the Vietnam and
Korean Wars, rising inflation and debasement of the
dollar, there was a run on Gold in the US. In 1971, France
sent a warship to New York to convert their dollars to Gold
and bring it back. After that, Nixon suspended the
convertibility of dollars into gold. All currencies now are
fiat money and therefore credit, with no real backing
except the Government's promise to pay.
Before Nixon closed the gold convertibility option, all
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currencies around the world were valued in terms of gold.
However, nothing really changed as there was liquidity of gold around the world. So to stop this physical draining of
gold, the Federal Reserve on 31st December 1974;
introduced gold futures in the Comex exchange. This
helped in manipulating the price of gold. The Comex
contracts were settled in cash and not in actual gold. So
for the first time in Gold's 5000+ years history, gold was
allowed to be leveraged. Hence they could inject an
unlimited amount of gold contracts to dilute the price of
gold. This started a 50 years’ slippery slope. At some
stage, this House of Cards will come crashing down and
gold will have to be revalued. From 1st January 2023, as
per Basel III norms, gold is also now considered as a Tier 1
asset.
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GEOPOLITICS
The US debased their currency with the unbridled
printing of money. With Russia’s recent policy of using
dollar reserves as a weapon, and the spread of Swift
system; there has been a gradual move towards
de-dollarizing the world. This is still better and less
extreme than the collapse of the dollar, which could result
in a war. BRICS nations are looking for a commodity based
alternative to the dollar. Bilateral trade is increasing and
Gold is likely to play a part here. That is why in the last 3
quarters, there has been an unprecedented purchasing of
gold by Central Banks. The March-end quarter gold
purchases of the Central Banks were slightly lower than
December 2022, but 176 times more than the March
quarter of the last year. This kind of purchasing of Gold by
Central Banks was last seen about 50 years ago.
Central Banks holding of Gold
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In Tons |
United States: |
8133 (not been audited since 1956) |
Germany: |
3359 |
Italy: |
2452 |
France: |
2436 |
Russia: |
2299 |
China: |
1948 |
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China's gold holdings are likely to be 10 times higher than
they say they have. With China’s doctrine of "we must not
shine too brightly" , the true figure would be a declaration
of War. In 2010, China told their population to buy gold.
China is the World's largest gold producer and also the
World's largest importer.
India’s Sovereign holding of gold reached an all time high
this quarter at 794.62 tons of gold. However, Indian
families are believed to hold 22000 tons of gold.
Gold rewards infrequently but extravagantly and we need
to watch this space carefully
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Equity Markets
As the markets have run up for the last 4 months giving
higher highs without any significant corrections; our suggestion to investors is, to be a little conservative in putting
lump sum amounts directly into equity funds. Low equity
exposure funds can be considered for lump sum, or else
systematic investment is the ideal solution. The India story
is very well intact, but geo-politics and the monsoon may
cause volatility
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Debt Market
The RBI paused the raising of interest rates and during
June, the debt market has been range-bound. This is likely
to continue until the inflation cools off and interest rate
cuts start happening.
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Gold
Gold prices took a pause this month. However 10%
allocation to gold is advisable as a hedge to the portfolio.
It can go up in times of uncertainty.
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