[MUSIC] Hi everyone. Today we're going to have a look at the gold market. With this video you will find out that gold has been around for many, many, many of years. Indeed, more than 6,000 years. It has been used as a means of exchange, as an investment, as backing to the monetary system within the gold standard. And we will see in a second video, that it can serve even today as a hedge to many things like a falling US dollar, rising inflation, collapsing stock market, or political tensions. Some hard facts about the Gold market. Indeed, it's been one of the oldest ways to store wealth, and it can be traced in Egypt to at least 1400 BC. Some estimates put it even more going back to 3000 BC. It was used as a means of exchange, you would mint gold coins. And it was also used, obviously, for jewelry purposes and as a store of value, as an investment. But more importantly, and this was in the last century, as a backing to a fiat currency system, ie under the gold standard a Central Bank would only be allowed to increase money supply in accordance to the stock of gold it owns. Some historians such as Barry Eichengreen Argue that this was one of the reason why we had the great depression in the US. It was the inability of the US Central Bank to conduct a sufficiently easy monetary policy, expansionary monetary policy after the stock market crash of 1929. Because it was linked to the stock of gold alone, and so it could not increase enough money supply. In 1971, Nixon abandoned the fixed convertibility of the US dollar to gold because basically, there was a need to increase quite substantially the amount of dollars in circulation to cover for military expenses and a ballooning current account deficit. Recently, I was, well, not recently, a couple years ago, I was an in Kyrgyzstan in Iraq at a conference. And I found out that they have the story of the Swiss Iraqi Dinar. Now let me tell you, this is quite a funny story. I put it to some people at the Swiss National Bank and they didn't know about it. Indeed, the Swiss Iraqi Denali was the currency in circulation in Iraq prior to the Gulf War of 1990. And when the war started, then it was abandoned and they went to a straight Iraqi dinar, but the Swiss Iraqi dinar coexisted. And indeed, it was more stable than the official currency. And why was that? Because people thought it was backed by gold owned in Switzerland, and this was total [LAUGH] illusion, it was just a rumor. Indeed, when people found out that it was not proven by hard facts, the Swiss Iraqi dinar collapsed like the official currency. And it disappeared from circulation. So there is this idea today, and you find still a lot of pundits of gold that argue that we should go back to some kind of system backed by gold for that would constrain the central banks to create money just in a limited and controlled manner and stop going into an easy printing mode to pay for public deficits. So whether we should go back or not to the gold standard is a separate issue, but surely the question remains open of whether we should anchor the international monetary system to a stable, variable like gold in order to limit the supply and prevent monetary excesses. Let's start now with the first hedge that gold provides, and this is the hedge against the falling dollar. Now, why is this? But first, before we move into this, let's do a little quiz here. You see from this chart that we have two lines which are plotted. The red line is actually on the right hand scale and it starts at 35. $35. And it ends at just about $1000 today. Now you see, wow this is kind of odd, isn't it? Well actually, you can see that this is a logarithm scale. So you see the distance between zero and 100 is the same as between 100 and 1000. This allows us to show a key variable which has increased like gold quite substantially over the year. So, question to you is, what was the return of gold? Between 1971 and today on an annualized basis. So now that you find out how much gold has delivered over all these years, and you've seen that it's quite a decent return, we can see from this chart that it's actually the movements of gold are inversely related to the movements of the dollar. We see this when we look at these two lines and if you know me by now, you know that I make use sometimes of these funny scales. For instance, here we see the green line which is the US dollar as measured against a basket of currencies of the trading partners of the United States of America. We see, for instance, that between 1980 and 1985, the line falls. But it's actually a rise in the US dollar against all these currencies, because the left-hand scale is inverted. So there is this idea that gold and dollars And the U.S. dollar are inversely related. The correlation is significantly negative and the reason for that is that gold is mostly denominated in U.S. dollar. So the reasoning is that when the U.S. dollar falls, the attractiveness of gold for non U.S. dollar based investor increases, and so they purchase more gold when there is a fall in the dollar. Especially so that they are in the need for a new safe haven because maybe there are some political tension. And we'll see one example in the next video. [MUSIC].