The Evolution of Money

1.       Business community started business in form of barter trade

2.       Due to limitation of barter trade, the business community came up with an agreed item that represent value – commodity.

3.       Again due to the limitations of commodities: there are heavy, difficult to move around, the idea of receipt money came up.

4.       How the receipt money work is that the rich merchants will deposit their gold or other precious commodities into a reputable vault service provider in return the service provide will issue a receipt stating the value of precious commodities kept in the vault.

5.       The merchant pay for the good he bought using receipt money then the seller will present receipt money at the vault to convert into gold.

6.       The interesting part is the vault service provider realized that a lot of sellers did not convert their receipt money into gold, instead use it to pay for their own purchases.

7.       The process continued for years where the receipt money continue to circulate in the market without going back to the vault that issue it.

8.       Occasionally, some bearers of the receipt money appeared at the vault to request for a replacement of receipt money as it was torn or the ink faded but no one asked for gold.       

9.       The vault owner start to realise that since no one is asking back their gold and probably they have lost track of the original owner of the gold.

10.    The idea of issuing additional new receipt money during the waiting period to merchant that did not deposit gold.

11.    Of course for a fee known as interest.

12.    That is how the banking business started.

13.    The evolution in banking business give birth to the fractional reserve receipt money concept – issue 2000 while gold only worth 1000 – 2:1

14.    Proliferation of small banks started to issue their own receipt money and went bust.

15.    Lead to formation of bank of England and Federal Reserve was formed to regulate the banking industry

16.    Key regulation of central banks is only one form of paper money.

17.    Those who control central bank will b so powerful that control supply of money.

18.    Central bank objective is to regulate the supply of money with long term objective of economy growth and employment rate and policy interest rate.

19.    A critical decision severe the link of money to gold in 1971 has changed the anatomy of money.

20.    Since then money no longer back by gold, instead back by debt – a promise that will be paid in the future

21.    Hence, since 1971, money we use today is no longer “money”, but debt

22.    Since then, knowledgeable folks started to reject paper money

23.    Slowly, more and more wealth is finding its way to gold and other commodities that has ever lasting value

24.    Gold was valued at USD30-US40 per ounce – the price was derive from Bretton Wood Agreement (1944) where US has agreed to peg 1 ounce of gold ot USD35.

25.    This system worked well for almost 30 years – ie the gold price fluctuation was minimal but not after 1971.

  

26.    See chart above, gold shot up to approximate USD180 in Jan 1974 and retreated to just above USD100.

27.    Gold touched USD700 in Jan 1980 a whopping increase from 1970s.

28.    Where is gold price now?

         

29.    Although USD was fiat money, the American is so good in marketing their dollar to the whole world

30.    Gold stayed USD 250 – 450 range for period of good 20 years (1980s – 2000s)

31.    In early second millennium (year 2000 onwards) the mounting of US national debts and real demand from China and India has push gold to unprecedented territory – how about USD1,900 per ounce in early 2011.

32.    It is really mind-boggling.

33.    Let’s do a quick calculation: from USD350 (2000) to USD1900 (2011) : 540% increase in period of a decade.

34.    Why is it a fall in 2013 to current USD1200 level?

Gold

Gold is entering bearish phase. It next support level will decide whether it moving side way or downward. MA 200 has been breached twice. High chance gold will move side way until QE3 is materialised. Otherwise, i believe wealth will slowly creeping back to economy. No matter how pathetic is world economy growth range 2 - 3% at least still growth. But gold does not give any return. Honestly i think gold has been overvalued.

The fear is somehow subdue, the market only jitter for one two days longest one week whenever bad news emerged from Euro Zone. Probably people has been immune to this virus since 2008. People is started get used to crisis nowadays.    

Gold

40-year gold chart.

Back in early 70s, gold price was below USD100 and now it hits high of USD1,800. For those of us born after World War I and II could never appreciate the importance of gold as a vehicle to store value! If you talk to any investor or business man, they will tell you that it is dumb to invest in gold. As Warren Buffet, the legendary investor puts it, "you dig a hole to produce gold and dig another to store it". Worst still gold does not produce income. so why invest in gold? Well having said all this while, probably Warren Buffet is the one that keeping a lot of gold.  

Gold has gone through the test of time even during ancient time it is still the best vehicle to store wealth. Hence wealthy people will always think of gold during slow economy growth and uncertain time. During economy boom time, wealth is invested for various forms of economic activities such as boosting production capacity, services, building infrastructure, spending on luxury goods and even lend to somebody. To sum-up, wealth will be be placed with productive activities that produces economic returns. Hence who cares about buying gold during this period. Observe the period from early 1980s all the way to early 2000s. Gold price has been depressed for a period of 20 years. Gold price always has an inverse relationship with economic growth.

This chart is relevant to Malaysian readers. For those ladies who are keeping gold jewellery, are you aware that you wealth has at least quadruple by now! Should you sell them now and buy back latter! Haha......

Gold

Gold has a blip two days ago.

Paranoid theories cannot take the shine off gold

Have u ever wonder why people like to choose gold as an avenue for store of value. Apparently, there is a belief on a conspiracy theory that some invisible hand will continue to make sure gold price will be maintained or increased overtime. The goldbugs that continued to belief into this theory has been wright for the last 100 years i guess and based on the current trend of gold price, this theory is continue hold. if you wish to know more

By John Dizard

Published: October 9 2009 20:21 | Last updated: October 9 2009 20:21

They asked me to write about the goldbugs’ point of view, including the paranoia and conspiracy theories about gold. You know. “Them”. The request could have come in any number of ways: a note composed from cut-up newspaper headlines, or a “suggestion” from a muffled voice over the phone. In this case, it was an “FT editor”. I can only speculate about his true identity.

If you immerse yourself in the world of goldbuggery, the nothing-is-what-it-seems worldview can become that infectious. The paranoia of the goldbugs, die-hard believers in the value of the metal, has been with us a long time, intensifying since the collapse of the last great gold bull market in the early 1980s. Now, though, the goldbugs’ resolute disbelief in the legitimacy and value of official currencies is influencing mainstream market opinion, helped by this week’s record price of $1,061 per Troy ounce.

The fundamental premise of goldbug conspiracy theory is that the metal would have continued to hold and even increase its value over the years against the “fiat” currencies if there had not been a sustained, secret intervention on the part of some powerful group of market manipulators. The speculated-upon identity of the “Hand”, or “Seller”, or “Manager” varied over the years, from JPMorgan, the US Federal Reserve and Goldman Sachs (of course), to miner Barrick Gold or George Soros.

Underlying all the conspiracy theories are two convictions: gold is the only true measure of value, and the people in charge share the goldbugs’ belief in the centrality of the gold market in the organisation of the economic and financial world.

The first premise has both a material and a religious aspect. In the material world, gold’s chemical stability, rarity and ductility have in all societies made it a precious asset. However, that very scarcity and weight, along with the need to re-assay gold offered as payment, limit its usefulness as a medium of exchange for a world with today’s volume of trade. While it is a useful, and, over the longest term, essential, store of monetary value, there is a limit to the degree to which it can substitute for paper or electronic currencies.

The utility of gold as a store of value can, for the obsessive, verge on religious devotion, or even love, despite the Bible’s admonition that “the love of money is the root of all evil”. A true goldbug would probably say this applies only to the government’s money.

The second premise, that the committee or committees which run the economy do so through their setting of the gold price, had some basis in truth when governments or central banks were willing to buy and sell gold to set their currency’s exchange rates. The US government’s willingness to do that with the public ended in 1933, and its sales of gold to official counterparties ended in 1971.

For a few years after the 1971 “closing of the gold window”, the end of US government gold sales, there was residual interest in foreign governments’ valuation of their gold reserves. A website popular with goldbugs, Zero Hedge, recently revealed a 1975 Federal Reserve memorandum to President Gerald Ford, in which an argument between the Treasury and the Fed is outlined. Zero Hedge describes the memo as a “smoking gun”, and goes on to say: “So to all conspiracy theorists claiming that gold is being manipulated on a daily basis by the Federal Reserve: when it occurs over and over, and is so well documented, it is no longer a theory.”

The memo itself is rather less dramatic and has nothing to do with manipulation on a daily basis. Essentially, the Fed chairman, then Arthur Burns, was telling Mr Ford that if the French buy lots of gold it will lead to an increase in world liquidity and more inflation. As usual, Mr Burns was wrong. Gold was not necessary to inflate or deflate world liquidity; that could be done through money market operations by government currency issuers, including the French and the Americans.

Gold could move the larger financial world directly if central banks tied the level and rate of currency issuance directly to their gold reserves or to the metal’s price. Central banks, or a shadowy Doctor Evil, do not need to manipulate the price of gold if the price does not limit their freedom of action. What matters to governments is their ability to finance themselves through bond sales. This would be hampered if the bonds’ value was being eroded by higher inflation, or by devaluation of the currency relative to other currencies.

And that is what the gold price is beginning to tell us. The investing public may be too worried about imminent inflation; more likely, given the continued weakness in employment and wages, not to mention housing, we will have weak dollar-measured general price inflation. However, in spite of mantra-like official statements to the contrary, it would seem that the US government wants to competitively devalue its way to national prosperity.

That hasn’t worked yet, since the trade-weighted dollar is about where it was at the beginning of the crisis, but I am confident that if a government wants to debase its currency, it can ultimately succeed in doing so.

One of the advantages of being a goldbug now, or becoming one soon, is that it is one commodity whose price is not likely to be manipulated below its market-equilibrium level by the US government (“Them”, if you prefer). There will be attempts to limit speculation in such essential commodities as oil, grains, or base metals, but a gold price rise would simply represent a successful devaluation.

So while the goldbugs’ conspiracy theories are chimerical, their investment strategy is at last aligning with that of the real world.

The writer is an FT columnist