Sunday, April 22, 2012
IS THE EVOLUTION OF MONEY HURTING US !!!
It all started with “BARTER TRADE SYSTEM”: Long time ago the first trade was conducted via Barter. All goods were directly exchanged for all other goods. But this method had its own problems. If you want to swap your chicken for a loaf of bread, but baker happened to want firewood, you had a task to find someone with firewood who wanted to have chicken.
Then came the medium of gold exchange, under which everyone agreed to accept gold in return for whatever they were selling. This transition allowed the swapping of chickens for gold and then gold for anything else. The thing with gold was that it was indestructible and could be stored for the future. As gold also become the “Store Of Value” – if you had lots of chickens you could swap all of chickens for gold, spend only part of the gold on bread and keep a few gold for a rainy day.
Gold as a mode of money, created its own set of problems – Governments in financial troubles, would call back their gold coins, then melt it down and reform the same metal into more coins with lower gold content in it or mixing any other metal in it. For government, it generated a nice new stock of gold for conversion into coins. This is what called “Debasement of Currency”.
But debasement of currency became a huge problem and led to the development of certificates of gold deposits. Debasement & the larger monetary transaction required that the coins to be counted weighed and checked for its purity & authenticity. In addition to which there was constant problem of security, so this led to the development of the Gold Depository Banks whereby a group of merchants come together and formed Merchant Banks that would hold their gold securely at a central location. The quality of coin was checked, the depositor was issued with paper certificate of deposit. The certificate of deposit represented his holding of gold within the banks & the holder of this certificate was entitled to present the certificate back to the bank, who would on demand, exchange it for the same amount of gold coin originally deposited.
These banks soon realized that the owners of the gold rarely come back to collect it. As a result gold was lying idle with them most of the time. So, these bankers come up with a money making scheme of their own. These banker’s started issuing their own certificates of gold deposit and would lend those certificates to merchants. These merchants would use these new certificates to buy goods, which they would then sell on at a profit provided everything went well, the merchant could borrow the certificate, buy & sell the goods to make profit and repay the bank before anyone realized that the gold had left the vault which of course it never had.
Now, what this did was there were always more certificates of deposits in circulation than the gold in the vaults of banks. This in turn led to crisis situation during which individuals with these certificates landed up at the bank asking for their gold back. The trouble was that the bank did not have enough gold to make good against all the certificates it had issued. As this news spread, more people landed up leading to bank running, this soon led to a situation whereby a central bank was created which would fight financial instability. In return for the backing of the central bank, the commercial banks gave up their rights to issue their own gold depository certificates. From now on there would only be one type of depository certificates and these would be printed by the government, and be distributed through the central bank to the commercial banks. In addition, gold reserves of the commercial banks would be collected together at the central bank.
This created the concept of Currency Notes issued by the government. But what this also did was that it gave the government a monopoly on printing money. And unlike the kings of the earlier age, who had to call their gold coin back to debase them, now government could simply print more and more paper money as & when they deemed fit. And this right as we know has more or less been responsible for the current financial crisis.
IMPACT OF THE EVOLUTION OF MONEY: Let’s say US government prints $1 trillion and keeps it in its vaults, so then what would be the impact of this printing of money will be on the Inflation? The answer would be ZERO impact? Correct, simply because all the printed money is in the vault and does not enter into the economic systems…It is when the money enters the economic system which leads to a situation wherein more money chase the same or even fewer goods leading to price rise. At same time it is important how fast does money changes hands, meaning how fast people receive and then go out and spend this money. The faster they spend this money, more velocity money has and that in turn leads to a faster increase in prices & thus an increase in inflation.
SAFEGUARD FROM THE FINANCIAL CRISIS : When markets are erratic & at times unpredictable, then the wise thing to do is to step up exposure to an asset that would infuse a semblance of stability and strength to the portfolio. And the cleanest, simplest & most efficient way to do is to invest in GOLD ETF. Not to mention the fact that the rampant way in which countries are debasing their currencies, one cannot help feel that at the end of the day, bullion will be more valuable than billions.
BUY GOLD ETF's: There are new alternatives to invest in GOLD ETF’s - CLICK HERE , ETF’s – known as Exchange traded Funds which are listed on NSE. ETF just like any other mutual funds collects money and invest into the market. GOLD ETF’s collects funds and invests in GOLD. They buy gold physically – so the units are backed by 0.995 finesse gold. When you invest in GOLD ETF you are allotted a unit same as in mutual fund, here 1 unit of GOLD ETF can be 1 gm or 1/2 gm of gold depending on the funds – So Gold ETF are affordable. GOLD ETF’s trades like normal equity share on exchanges whose prices are in tandem with domestic gold price. If you dint have Demat account you still can invest in GOLD FUNDS like SBI GOLD FUND, Quantum Gold Saving Fund. You can also invest in these ETF in a Systematic Investment way (SIP) with as low as Rs. 500. JUST call your broker to buy GOLD ETF’s (List of listed ETF are mentioned below) or just visit your nearest bank and ask for GOLD FUND (if you don’t have trading account)
Listed GOLD ETFS
READ MY POST ON ALWAYS BUY GOLD