What Happens When There Is Excess Gold in the Market?
Gold is a commodity that can be bought, sold or traded just like any other. However, most economies are intrinsically tied to gold. The gold standard, for example, is a typical economic system where the value of money is representative of a fixed weight of gold. This means a surplus or shortage of gold causes the economy to react in unique ways.
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Gold as Currency
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Economic systems evolved out of bartering. When people wanted something, they traded something else for it. If you did not have what the other person wanted, or your goods went bad quickly, you were out of luck. Using commodity money, that is giving a value to something which will last and can be traded, solved bartering issues. Gold came to serve the function of money because it was rare enough to retain value, and easily formed into coins, bars and other shapes. The value of goods and services could be represented by a specified weight of gold, and later official, standardized coins. This eventually led to the gold standard, and non-gold money being circulated. This money was guaranteed by governments and financial institutions to be exchanged for specific amounts of gold, allowing it to retain value.
Surplus Gold
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Just as with other commodities, the law of supply and demand has bearing on gold. When there is excess gold in the market, the overall value of gold goes down. However, the price of gold rarely makes major moves up or down unless extreme factors come into play. A huge deposit of gold being sold may temporarily raise supply and lower the price. Wars cause people to worry about the value of currency, causing gold prices to raise. Overall, the price remains fairly steady at any given time, when adjusted for inflation.
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Gold Shortage
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While a gold surplus won't have a major impact on an economy, a gold shortage can cause disaster. Though the Gold Standard was largely removed by U.S. President Richard Nixon, it is still a standard exchange commodity around the world. A government without gold to back its currency will quickly suffer from rampant inflation and its money becomes devalued.
The Future of Gold
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Gold is a long-lasting commodity. It is easy to store and maintain, and some people hoard it. Governments keep tight control over their nations' gold supplies in order to keep their economies steady. While most modern countries have moved away from the gold standard, it is still in use. There is security in tying currency to a valuable commodity, and many economists warn that losing the gold standard puts our economic systems in danger. It is possible we will one day return to the old gold Standard system. The price of gold continues to rise and fall.
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