It seems that gold has always been a valuable commodity. In historic times it was used, along with silver, in coins which allowed a convenient method of carrying around the value, and paying for things. As recently as the beginning of the 20th century, gold coins were part of the foundation of the world’s currencies.

Why gold in particular is recognized to have such value is a matter of conjecture. Certainly it possesses many positive properties, as it does not rust or deteriorate, it glitters and is attractive, and also appears in other items considered of value, such as decorative jewellery. Coupled with the fact that it is reasonably difficult to find and extract, adding to its scarcity value, it was ideally placed to become the metal of choice for bartering and shopping.

At one time there was a “gold standard”, where banknotes and coins made of cheaper materials would have their value backed up by a store of gold held by the government. Various pressures conspired to change this arrangement in the first half of the 20th century. The amount of money needed to rebuild countries after two world wars virtually mandated the separation of the amount of gold held in reserve compared with the amount of currency in circulation, as to rely on the amount of gold available as a backup would have prevented the necessary reconstruction expenditure.

The ability thus discovered of governments to create money without having equivalent value in store has allowed the modern economies to develop. The recent global economic meltdown was both exacerbated by money creation without material value, and recovered from by creating and spending money on recovery programs, increasing paper debt.

The price of anything depends on supply and demand, and so it is with gold. The supply of gold is fairly constant, and most of the gold ever found is still in recognizable existence. If brought to one place, it could be formed into a cube with sides three metres shorter than a tennis court, and it would weigh 150,000 tonnes and be worth several trillion pounds sterling. The amount of gold available globally is only increasing at a rate of about 2%, despite all the mining activity. As a scarce natural resource, gold represents a valuable investing opportunity in the long term.

However, there are problems with investing in gold. One is that the price depends on its perceived value, and as has been seen in recent years this can fluctuate wildly, given that there is no significant associated commercial or equivalent worth to stabilize the price.

Couple this with the fact that gold is an inert asset, yielding no income or dividends, and indeed costing money for security to keep it safely, and holding pure gold starts to seem more of a liability than an investment.

Yet worldwide universal sentiment tends to regard gold as the “safe haven” to which investors rush if they see trouble in the markets or in fiat currency, and it is a fact that the price of gold on a market depends on the perception of the general public far more than any easily demonstrable value.

Historical Perspective

Since the beginning of recorded history gold has been regarded as a valuable symbol of power. The Bible includes more than 400 references to gold, such as Moses’ people worshiping a golden calf, and it’s thought that in those times about 30,000 ounces of gold were mined each year, mostly by ill treated slaves.

The amount of gold in existence has been increasing exponentially. At the end of the 18th century, the world had less than 40 million ounces. The end of the 19th century saw less than six times that figure, 226 million ounces. By the end of the 20th century this had multiplied up to more than three billion ounces.

Annual worldwide gold production peaked at the turn-of-the-century, at 2650 metric tons. The production from South Africa has declined over the last decade, as gold reserves become increasingly difficult to extract, and this demands that the price of gold is consistently high to make it worthwhile. The bear market for gold in the 1980s and 1990s shows that the anticipated inexorable climb in prices was mistaken, and the amount of time it takes to exploit underground reserves casts doubt on the financial viability.

Interestingly, it is not simply gold mining which has a significant impact on the supply and demand for gold. The central banks own around 30,000 tons of gold, and the disposition of this is as important as gold mining.

Traditionally, gold has been the commodity which investors tend towards when faced with monetary inflation. For example, recent years, at least until the global crisis, saw increased spending, inflation and an increase in gold price. Gold was priced at less than $300 per ounce in 2000, and topped $600 per ounce by end of 2006. Other precious metals such as platinum, palladium, and silver fared similarly.