The Hong Kong Gold Market during the 1960s: Local and Global Effects

Historically, gold has embodied particular characteristics that make it come close to the classic definition of money; a store of value, a means of exchange and a unit of account. These properties are reinforced by its physical properties, particularly at times when paper or fiat money is discredited. Gold cannot be manufactured, it is malleable and easily divided, its chemical properties are well defined so copying is difficult, and its high weight-to-volume ratio means that its small bulk is convenient for transactions and transport. Gold functions as a safe haven or hedge against uncertainties about the future value of fiat currencies, even when inflationary expectations or political risk tend to influence short-term fluctuations in the demand for gold. The combination of gold’s physical properties and its store-of-value function encourages its use in ornaments and jewellery that can, in emergency, be sold. But since the supply of gold is relatively inelastic, such fluctuations in sentiment are quickly translated into price volatility. This was particularly evident during the 1970s and early 1980s global inflation and the late 2000s global financial crisis, when the price of gold soared due to instability in the international financial and monetary markets. As the rate of price increase rises, the capital gains from gold also increase, attracting speculators to reinforce this trend. Unlike most other forms of security, however, gold does not generate a yield and its capital gains are only captured when it is sold. Historically, speculative bubbles in gold have abruptly burst, leaving capital losses.