The recent rise and (possible) fall of gold and e-gold
In 1944 at UN currency and finance conference at Breton-Woods, which aimed to redress the shattered post-war world economy, the economists have agreed that any monetary unit in the world should be backed with gold. But this resurrected gold-standard system ended in 1973 (with hugely devalued dollar) and has declared special drawing rights (SDR) in International Monetary Fund (IMF) – SDR as world money. SDR became an international accounting unit with US dollar kept as the important currency. No one then thought to come back to any gold backed currency again. Money re-established itself again as a commodity.
Ever since, investors known as gold bugs snapped up the metal and socked it away, betting that a colossal economic crisis would one day slam financial markets and send gold prices through the roof.
For many investors, that grim scenario is in full swing, except for one thing. After briefly hitting $1,000 an ounce, gold has fallen into a rut and shows no sign of budging anytime soon. Gold’s failure to flourish despite broad financial carnage has disappointed many of its champions. Others say it’s simply in a lull and is ripe for another big surge. But most gold buyers agree that the metal’s lackluster performance lately has been surprising.
So what happened? As the financial crisis pummels financial markets around the globe, hedge funds and other large investors who drove gold to dizzying heights earlier this year are now racing to unwind those positions to raise cash and cover huge losses. The massive deleveraging has pounded other commodities from crude oil to corn to copper.
“Gold is being pulled down by indiscriminate selling of virtually every asset,” says Jeffrey Nichols, managing director of American Precious Metals Advisors. “You could call it collateral damage.”
Instead of gold, investors are pouring money into the newest safe-haven asset, cash, pushing the dollar to multiyear highs against the Euro and the pound, hurting demand for gold among investors who buy the metal as a safe haven against inflation. Economists now warn that a world economic slowdown could bring about massive deflation of the world’s main currencies, or a sustained period of falling prices, and it’s unclear how the metal will respond in long-term. However there is some evidence that gold prices reached a turning point, a threshold, which may turn around its recent decline.
“Gold hasn’t been tested in a true deflationary crisis, so we don’t know what will happen to prices,” says Jon Nadler, precious metals analyst with Kitco Bullion Dealers Montreal.
In paralell, since 1996, another milestone event twisted the “gold vs. money” story even further. With advent of the Internet in 1994, online communication, business and information sharing has been exponentially gaining ground. Year 1996 saw birth of E-gold. The idea was simple. People would eventually believe in electronic money and use it more willingly if the money was provided/backed with gold. The funds on account of E-gold system convert in this metal by default. The payment system also provides an opportunity to back money on the account by other precious metals, such as silver, platinum and a palladium.
The history of e-gold payment system development is only twelve years old, however the company has already passed a way from conceptual idea of payment system to world service governed by American company Gold and Silver Reserve, Inc. Its one day turnover around $1500000. Such popularity is caused by the fact that in case of becoming an e-gold system user, a physical or legal person has an opportunity to perform an effective financial operations and calculations, because after funds transfer a simple redistribution of the rights to precious metal occurs while its physical location does not change. According to Gold and Silver Reserve, Inc. the e-gold gold reserves are in Brink’s Global Services, Transguard Security Services and MAT Securitas Express AG storehouses. It’s interesting to note that e-gold system isn’t tied to any currency and works with eternally liquid metals. This allows anyone to open an account free of charge. This democratic approach attracts to e-gold about 2500 accounts every day. As of July 2008, e-gold claims to host more than 5 million accounts. However, e-gold not only proved to be a favorite target of hacker attacks, but in December 2005, the US government froze its bank accounts and assets (cancelling freezing measures due to absence of inculpatory evidence one month later) and in July 2008 its directors pled guilty to charges of “conspiracy to engage in money laundering” and the “operation of an unlicensed money transmitting business.”
Nonetheless, there are optimists who are “confident that a regulated e-gold rebuilt to a more systematic specification will be less hospitable to criminals, and more attractive to mainstream business use without being less accessible to those disregarded by legacy payment systems.“