Gold is universally recognized as a form of money that has retained value over decades, centuries and millennia. Since it is non-corrosive and precious, approximately 95% of the gold mined since the dawn of civilization remains in circulation (~205 million tonnes). The largest share (~47%) is held as jewelry, which in addition to its sentimental value is an important store of family wealth. Governments hold ~17%, which was used historically to back the value of national currencies and, although this is no longer the case, these reserves are often used in times of political crisis to stabilize a national economy. As an elemental metal, gold has numerous uses: about ~10% has been incorporated into electronics, computer and aerospace components, as well as in dental applications and medical devices. The rest (~23%) is held by private investors as a financial asset to hedge against inflation and geopolitical instability. Often referred to as ‘goldbugs’, these individuals are ardent believers that the long-term trend in the price of gold is upward. Only a small fraction of financial transactions is conducted using physical bullion. The overwhelming majority of trades are executed via derivative securities that track (and drive) the price of gold. Until recently, this mainly consisted of futures and option contracts, but increasingly traders speculate in exchange-traded funds (ETFs) that are essentially ‘derivatives of derivatives’. Buyers are wagering the price will rise, while sellers are betting the opposite, at least over the short term. Gold markets are an example of pure financial speculation.…This article was originally published on Mongabay
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