The Glittering History of Gold

Reading Time: 6 minutes

The desire for gold is the most universal and deeply rooted commercial instinct of the human race

– Gerald M. Loeb, American Stockbroker

Diwali is one of the biggest festivals in India – lights & diyas glitter houses, sweets take over the diets, and there’s a celebratory atmosphere in almost every street of the country. Diwali is also a time when a large part of the country buys gold.

Given the high value of gold, many gift it to near & dear ones as a sign of showing affection & reinforcing the relationship – the amount of gold being gifted often being directly proportional to importance of that relationship.

Gold is also used in the religious ceremonies taking place during Diwali. In fact, so deep rooted is gold’s association with Diwali (and weddings) in India, that perhaps gold is the most purchased thing in the Diwali period. Take that, iPhones & OnePlus7!

But how did this come to be? Has it always been like this? And is this craze for gold only in India, or a reflection of the broader cultural significance of gold across the world?

The Origins of Gold

Since the dawn of human societies, gold has been associated with wealth, richness, and prosperity. Gold has been accumulated (and hoarded) as treasures across most ancient civilisations, like the Indus Valley, the Pharaohs of Egypt, the Chinese dynasties, or the Roman Empire.

Roman gold coins from 1st century AD, featuring Emperor Nero

Even the famous phrase of someone having the “Midas touch”, actually comes from Greek mythology about King Midas, who supposedly had the ability to turn anything he touched to gold!

The rise of gold’s importance was primarily driven by basic demand & supply – various civilisations independently realised that gold was not as freely available compared to other resources, and started valuing it more than others.

Gold also had (and still has) certain properties that made its adoption convenient – it could be easily moulded, stored, transported, etc. As human civilisations came up in different parts of the world & societies moved away from the barter system, gold was quite a natural choice to become the new standard.

“Such money first appeared in ancient Mesopotamia in the middle of the third millennium BC”, writes Yuval Noah Harari in his best-selling book Sapiens. This was quickly adopted by other civilisations in other parts of the world due to its convenience & ability to be standardised.

Perhaps the most lasting impact was left by vast Roman Empire, which minted its own gold and silver coins that carried the seal of the Roman Empire.

Such was the trust people had in these gold & silver coins, that “in the first century AD, Roman coins were an accepted medium of exchange in the markets of India, even though the closest Roman legion was thousands of kilometres away“, further adds Harari in his book.

Gold & the modern economy

Gold continued to remain one of the most valued items throughout the following centuries. In fact, by the 19th century gold was already playing a key role in international trade & monetary transactions.

Bretton Woods Agreement of 1944

With the turn of the 20th century came new thinking in economics – the idea of a central bank that issued currency, and a monetary system based on that. The idea was that these banks would issue paper currency, which would be backed by gold. Thus, instead of carrying around gold/silver coins, citizens of that country would instead carry around & trade with this fiat currency, which in turn could be redeemed for gold.

In 1944, as the World War II was nearing an end, 44 countries of the newly formed United Nations entered into what’s known as the “Bretton Woods Agreement“. Amongst other things, it directly tied the value of the currency of each of these countries to their gold reserves.

Effectively, each country’s currency was tied tot the USD, which in turn was pegged to gold. It was the first time in history that so many nations agreed on a financial matter! Also, in most of these countries, citizens were not allowed to physically hold gold bullion & coins.

Overview of the Bretton Woods System. Image maybe subject to copyright.

Then in the early 1970s came a landmark moment – the US central bank (Federal Reserve) decided to break away from this “gold standard” by terminating the convertibility of the US Dollar to gold. This basically meant that it would no longer exchanges its currency for gold, and that going forward its currency would only be backed by trust in the US Government.

In December 1974, the US Government allowed private citizens to store & trade in gold after a period of almost 40 years!

This naturally sparked an increased interest in gold, with many institutions and individuals looking to buy & store gold again. By this time, the equities and fixed income markets had already been established in the US (and other parts of the world) – and this change in law added a new tool in the investment portfolio in the form of gold.

Gold as an investment

Now that gold was available to most people to invest in & financial investments were already picking up, investors and academics alike turned to study the effects of gold as an investment.

Multiple studies and academic research shown over time has established a few properties about gold as an investment:

  • Diversifier/Hedge: Gold tends to have a low or negative correlation with financial assets like equities, fixed income, and even real estate. What this means is that the price of gold doesn’t move in sync (or sometimes in the opposite direction) with that of other securities like stocks, bonds, etc.
  • Safe haven: In times of global/domestic turmoil – like outbreak of war, natural disasters, economic meltdowns, etc. – the demand for gold increases as people perceive it as an asset that will not lose its value due to these negative conditions. In such times, the price of gold invariably tends to increase!
Correlation of Gold with other assets. Source: World Gold Council

To learn more about Gold as investment, check out this blogpost, where we make the case for having gold in your investment portfolio.

The Gold Market in India

India is one of the largest consumer markets for gold, thanks to the large population and the cultural importance of gold in societies & religions across India. The below infographic from the World Gold Council highlights the various factors/stats impacting the short-term & long-term demand of gold in India

Source: World Gold Council

Gold Investment Options

The traditional avenue of buying gold is in physical form, either in the form of jewellery/ornaments, or in the form of coins, bullions, etc. But thanks to the advent of technology and modern financial instruments, today a gold investment can be made in multiple other forms:

  • Sovereign Gold Bonds: issued by the Reserve Bank of India on behalf of the Indian Government, these are bonds denominated in grams of gold and offer returns linked to the market value of gold + a fixed additional return. As such, investing in them gives a bit more than the market returns of gold. Started in 2015, subscription for these open up on a periodic basis.
  • Digital Gold: These investments are held in digital form, while the underlying remains with the platform on which this is purchased. Paytm, PhonePe, MMTC-PAMP, etc. are such services which offer digital gold. Note: this is still a nascent business, and regulations in this regard are still a bit unclear.
  • Gold ETFs: ETFs are like mutual funds that trade on an exchange. Gold ETFs invest in gold and give gold-like returns. To learn more about ETFs, check out this post on ETFs 101: What is an ETF?
  • Mutual Funds: There are a few gold-focused mutual funds – however, they don’t directly invest in gold. Instead, they usually invest in Gold ETFs, and as such are an inefficient means to take gold exposure due to double expense ratios
  • smallcases: There are few asset allocation smallcases that provide a readymade exposure to gold along with equities and/or fixed income. Remember that gold is an excellent diversifier? That’s why combining them with other assets creates a holistic and safe portfolio. To learn more about this approach, read the detailed blog on asset allocation.

It’s true that all that glitters is not gold – but gold definitely glitters, as an asset as well as an investment. This Diwali, rather than merely buying gold, invest in gold and discover for yourself the positive impact it has on your overall portfolio.

Happy Diwali, and happy investing! 🙂

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Vikas Bardia @https://twitter.com/vikasbardia

Investor + startup guy who loves to chase rooftop & sunset views. Go long and prosper! 🖖🏼

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