What makes gold attractive and what is the ‘value’ behind it?

Everyone knows about gold. From watches to jewellery, you might probably have seen your grandparents wearing them or keeping them in their drawers; which would be given as dowry.

While most people see gold as a symbol of wealth and status, how many understand the dark history behind gold – how wars, racism and nativism were caused because of the shiny yellow object that we called gold.

Back in the year 1519 – 1521, the Spanish plundered Aztec (Modern-day Mexico City) for their concept of wealth. For the Spanish, gold and silver represent wealth. They would prefer to have them in bars or coins – the more, the better.

Illustration by Irina Botcharova

The Aztecs have a different perspective of wealth. While gold was abundant in Aztec, it was used primarily for ornaments, decorations and plates. Their concept of wealth was elaborate cloaks and headdress made out of brightly coloured feathers – like the image shown above.

At this point, you might be wondering why are feathers used as a symbol of wealth.

This is because human wants are subjective, and it varies from person to person and at different time period. Value is assigned to a particular instance of thing based on how useful one believes.

For example, our representation of wealth may be branded goods such as Louis Vuitton. While we may agree that these products allow us to be associated with high Socio-Economic Status (SES), the perception of humans may change a century later. They would probably be wondering why humans in the 21st century used leather goods as a representation of wealth.

Putting the brief history lesson aside; there is no intrinsic value to gold. It is attributed just like how humans did for feather headdress and leather goods.

Why is gold still valuable if the value is subjective?

Gold possesses intrinsic physical qualities such as durability and malleability. Although there is no intrinsic value, the rarity, luster and colour of gold have made it a prized possession throughout the world. It has played an essential role in the international monetary system as countries were using gold coins as currency. This helps to unite us despite our language and cultural differences.

The rarity, luster and colour of gold

After the introduction of paper money, there was still an explicit link between paper and gold. This is also known as the ‘Gold Standard’ – it is when a country ties the value of its money to the amount of gold it possesses. Anyone holding that country’s paper money could present it to the government and receive an agreed upon amount of gold from the country’s gold reserve.

Unfortunately, the gold standard only lasted a period. The country’s gold reserve was depleting as people were hoarding gold because they didn’t trust any financial institution.

Fast forward to the present day, countries no longer use the gold standard, and it was replaced entirely with fiat money – A currency without intrinsic value that has been established by the government as money.

Will gold retain its value?

There is no implicit guarantee that any forms of currency will retain its value in the future. For example, Venezuelan bolívar (VEF) used to be valuable (In the year 1998, 1 USD = 0.5 Bolívar); individuals are using bolívar as an exchange of value for products and services. However, with the recent inflation of more than 40,000 per cent, the currency is essentially ‘worthless’ (Today, 1 USD = 206,840 Bolívar).

USD – VEF for the past 20 years

Unlike fiat money, gold does not have any inflation and is not issued by any government. It is commonly known as a safe haven for investors since it has withstood various social, political and financial climate throughout history. Just like how the gold price went up during 2008 financial crisis, it would continue to be valuable as long as there is demand.

Gold’s Correlation to the Equity Markets

SPX refers to S&P 500 Index – An American stock market index based on the market capitalisations of 500 large companies having common stock listed on the NYSE or NASDAQ

How can we invest in gold?

One of the most common methods is to invest in gold ETF (exchange-traded fund). It is a commodity ETF that consists of only one principal asset: gold.

If you are using Smartly to invest, your investment portfolio may consist of SPDR Gold Trust (GLD). It is the largest ETF to invest directly in physical gold. It tracks the gold spot price, less expenses and liabilities, using gold bars held in London vaults.

While there is no ‘gold standard’ when you redeem a gold ETF, you’ll be given the cash equivalent of the gold. The price of GLD is about 1/10 of the price of gold – if gold futures are trading at $1,500, then GLD will trade at approximately $150.

How does it work?

GLD trades like any stock. Depending on the number of shares you hold, you may make a profit or loss depending on the price movement. For example, if you are holding 100 shares of GLD and the price moves from $150 to $151, you would have made a profit or loss of $100.

To get started with gold investment, you can head over to our platform and get a personalised investment portfolio based on your appetite for risk. You may have a portfolio which includes SPDR Gold Trust (GLD) as one of your investment holdings.

Give it a gold and try Smartly out today.


One thought

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s