Commodities: The Sweat of the Sun, Gold — An Introduction of the Market
The first commodity that an investor needs to know about is gold. Human history is full of stories about gold. Stories and legends about golden cities like “Eldorado,” or people that with a simple touch would turn anything to gold like “King Midas.” Gold is an unbreakable piece of the world’s financial history.
Quick Financial History
We have evidence from small caves in Spain that humans were interested in this rare metal since 40,000 BC. The oldest gold mine map was drawn in ancient Egypt in 1,320 BC. The first gold coins were found in Lydia, in western Asia Minor, around 610 BC.
Archimedes (287 BC-212 BC) was eligible had his Eureka moment when he found a way, through water’s upward buoyant force, to check the purity of the King Hiero II of Syracuse crown in gold. In Rome, Emperor Augustus (63 BC-14 AD) had set the price of gold at 45 coins to the pound. The trend of setting gold’s price was continued until recent times.
Between 1312 and 1337, the richest man in history, Mansa Musa, the ruler of the Mali Empire, traveled across Africa and the Middle East with hundred camels loaded with gold. So much that depressed the monetary price in Egypt for over a decade and caused high inflation.
The Incas of South America, between 1438–1533, were referring to gold as “the sweat of the sun,” and Alchemists in the middle ages were trying to create gold out of other elements.
Between 1792 and 1900, bimetallism was the monetary standard. This standard set a fixed rate of 15 to 1 between silver and gold, and those two were redeemable in monetary units. In the same year in the U.S, the gold standard was passed. This new standard set gold as the only standard for redeeming monetary units.
After 33 years, the US left the domestic conversion of paper money to gold, and in 1944 with the Bretton Woods system, the U.S. dollar became the monetary standard for gold conversion. In 1971, the Bretton Woods system was abandoned, and gold got a variable rate of conversion.
Gold is a chemical element defined as a “transition metal” in the periodic table. Its symbol is AU from the Latin “aurum,” and it has an atomic number of 79.
- Chemistry Symbol: AU
Unlike the alchemists of the middle ages, we are now able to construct gold out of other elements in a nuclear reactor by irradiation of either platinum or mercury. The cost of this process though, exceeds by far the monetary benefit of creating artificial gold, and thus it will not replace gold mining for the decades, or even centuries, to come.
In nature, gold is created, through the rapid neutron capture process, inside stars like our sun, but after they explode into a supernova.
Gold does not react with oxygen, and thus it doesn’t rust.
Gold Mining and Pollution
The process of gold mining starts by finding a new digging site and start constructing the mining infrastructure. This process usually takes up to 15 years. According to the World Gold Council, less than 0.1% of prospected sites turn out to be profitable. The gold mining stage can last up to 30 years. The process involves extracting gold from rock.
This process involves, in many cases, the usage of the chemical element of mercury, in order to optimize the recovery of gold pieces from rocks. Mercury is highly poisonous, and in many gold mining sites, the processes leave a number of poisonous mining waste. These wastes are highly hazardous, and they are second only to nuclear waste. It is been estimated that 45,000 metric tons of mercury have been used for this process in California, and they haven’t been recovered.
The World Gold Council has created safety standards for gold mining, and they communicate the details in the following link https://www.gold.org/about-gold/gold-supply/responsible-gold
So far, it is estimated that 75% of the gold extracted so far has been extracted since 1910, and if we were to meld it together, it would create a 20m-side cube.
In our days, the mining of gold has been declined.
47% of the world’s reserves are been held as jewelry, and only 10% of new gold mined have industrial usage. An example would be the AKG C414 XLII gold condenser microphone. Sectors that use gold are medicine, cuisine, jewelry, and electronics.
The gold pureness is been measured in “karats,” with 24 karats or 24k been pure or fine gold.
Gold in the Financial markets.
The International Organization for Standardization (ISO) has used the code ISO 4217 to standardize currencies and precious metals and separate naming confusion. Gold has “XAU” as its code, and this three-letter code is been used throughout the financial markets.
- The symbol in Financial Markets: XAU
- Example In a Pair: XAU / USD
The biggest percentage of the world’s gold is held into “gold bullions” also known as “gold bars,” and central banks are the biggest gold reserve holders. The U.S, Germany, Italy, France, and Russia make the top five countries per gold reserves in the world. These reserves are been help to support government expenditures but also to sustain their growth against the inflation rate. This exact usage has gold for retail investors.
The above-ground gold reserves are been worth $10,9 trillion, with a rate of $1,715 per ounce.
Gold Investment Vehicles
Gold has a variety of trading and investment vehicles. One can trade gold in a pair with other currencies like the XAU / USD pair, can buy or sell derivatives like futures or futures options, can buy gold ETFs, or invest in companies involved in gold mining and processing.
Gold is mainly used to hedge other investments and save the holder for downward moves, because historically when the overall economy is moving downwards, investors use gold as safe-heaven, and thus gold moves in the opposite direction.