Investment 04 Sep 2017
Did you know that gold was an integral part of the monetary system that existed between 1870 and 1914?
Let’s go back to the era when the monetary system glittered – The gold standard.
The gold standard is a monetary system that linked the value of currencies to gold. Such currencies could be freely converted into a fixed amount of gold. Under this system, the imports and exports of gold were free of restrictions. Countries using the standard would fix a price for gold. All the buying and selling of gold was then carried out at this price. Also, the value of the domestic currency was derived from such a price.
The United Kingdom – 1819
Portugal – 1854
Germany – 1871
By 1900, all countries adopted the system, except China and some Central American countries.
There were no set rules for the gold standard. However, the government and the banks were expected to observe certain rules. These were known as the ‘rules of the game’. Few of the rules:
The gold standard could not stand the test of time. The post-World War I era witnessed its major break down. However, several countries tried to adhere to the standard even then. This monometallic standard finally collapsed after the Great Depression in 1929.The bottom line
“The gold standard is a jealous God. It will work provided it is given exclusive devotion,” said Geoffrey Crowther, a British economist. Gold was an important part of the monetary system for about 50 years, but several economic and political factors led to its fall. It has now been completely replaced by fiat money i.e. currency that is used because of a government's order — or fiat — and is thus accepted as a means of payment.For US, it is Dollar, for India, it is INR, for Dubai, it is Dhiram. Today, gold isn’t used as a currency, but eternally stores economic, social, emotional, and aesthetic value.
Gold futures are instruments that are traded on the MCX. One can buy into these gold futures in order to invest in gold. These futures contracts tend to track gold prices. Moreover, the investors have to ensure that they settle these futures contracts by pre-determining a closing date.
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