There are three main causes of stockpiling gold. People, countries and institutions may stockpile gold for future profit or investments in the future, for security in terms of emergency funds and lastly to back the economy during a crisis. These three main causes of gold stockpiling are the reasons behind the intention by many people to maintain stocks of gold each of them are discussed in detail as below;
First, stockpiling of gold is meant for investment. In this regard people, institutions and governments anticipate making future profits from the appreciation of the value of gold. According to Beechy and Conrod (1998) anticipation of market trends through the evaluation of the price value of the gold product in the present and the future. Hence the revenue that could be earned is recognized at the point of acquisition of the gold and inventory is written on the gold’s net realizable value in the future (Beechy & Conrod, 1998). Historically, gold stockpiling was informed by the need to ensure that people secure their assets by storing the gold when it was on low demand or when it was in plenty in anticipation of creating a low supply of the commodity in the future. This then generates greater demand for the commodity in the future that ultimately raises the price of gold. Therefore, people could earn more on the gold in the future by ensuring that they stockpile the gold for future profit (Newby, 2007).
Governments can also stockpile gold in anticipation of gaining economic advantage over those countries that do not control the gold commodity. In this regard, gold stockpiling is meant to create an economic sabotage situation where countries that have control over the commodity can take advantage of their assets in gold to exploit countries that do not have gold reserves. They may do this economic sabotage in order to gain profits from the gold that they have collected (United States Congress, 1976).Other people anticipate making profits on the gold reserves they have based on the prices of other precious stones such as diamonds and silver. In this regard, they generate enough stocks of gold that they in the future will have the intention of exchanging with diamonds or silver in an attempt to earn more profits. This is usually referred to as the time series momentum where the gold eventually appreciates in value (Moskowitz , Ooi, & Pedersen , 2012). Thus the intention to stockpile gold in all the instances discussed is so as to secure reserves in anticipation of making profits in the future.
Secondly, stockpiling of gold as earlier mentioned can also be done for security in terms of the provision of emergency funds. Many people have been found to prefer keeping value in terms of gold rather than cash which they can easily convert into cash whenever there is need to do so. In this regard, people and governments may prefer to store their money in the form of gold rather than keep cash. Due to the high demand of gold worldwide, it is easily can be converted into cash when there is an emergency situation. For instance in the case of an urgent need for money, the gold can then be exchanged for money which can then be utilized for funding the emergency (Odean, 2013).
According to Waag (1993) gold has been used by the military in the past as a form of emergency currency where there was a need to develop a unit of exchange that could be utilized in place of money. Hence the money is a substitute for gold and vice versa meaning that gold can be used to create an avenue for exchange where cash may be difficult to utilize. Recently, the state of Colorado made headlines when it was featured in the news for depleting funds cleaning mercury from Mancos tailings. To salvage the situation the state of Colorado employed the use of gold that was at the time of the controversy being illegally mined from the state. Nonetheless, the gold proved substantial in providing emergency funds that were required by the state to in cleaning the mercury from Mancos tailings (Hanel, 2013).
The third and final cause of stockpiling of gold is so as to back the economy during a crisis. There are various reasons why business people and governments stockpile gold for the purpose of economic stability. For instance, to protect the local economy from hoarding of gold by nations with majority of the gold in the world. In a case of economic sabotage, the country may suffer an economic crisis if it has no gold reserves of its own to ensure that the country can transact business with other countries who also have gold (United States Congress, 1976). In anticipation of a looming market crisis countries of the world are continuously increasing their stocks of gold to secure the stability of their economies once the market comes down crumbling. Therefore, it becomes necessary to ensure that the state has enough reserves to maintain economic stability when faced by the global economic crisis that requires gold to salvage the country from economic breakdown. Some of the countries that have taken quite serious considerations in stockpiling gold for economic security include; China, Switzerland, Russia, France, Italy, Germany, and the United States of America (McWhinnie, 2014).
The economy can as well be protected from unnecessary conflict that may arise from the confrontation between the country and other nations which have control over the supply of gold. In this regard, the intention of the gold hoarding nations may be economic sabotage. In this regard, the country may opt to maintain its own stockpile of gold reserves so as to be positioned at an advantage in terms of bargaining power when faced with such a scenario (United States Congress, 1976). According to the Wall Street Journal, Russian has made investments in stockpiling gold with the intention of gaining power from the gold reserves in the future. In so doing Russia through its president Putin, intends to collect as much gold as it can over a short span in order to be in a position to create a shortage of the commodity in the world market. In this regard, gold prices will go up which Russia intends to take advantage of to create an economic emergency situation.
In such an instance, Russia can then control the world economy while at the same time protecting its own from the economic crisis (Arends, 2012). This is evident from the current shortfall in the amounts of gold that other countries currently hold which is reflective of the imminent intention of Russia in stockpiling gold. For instance, China is currently experiencing a deficit of 500-tonnes of gold which makes it vulnerable to economic sabotage that may arise, as a result, of Russia’s hold onto the world’s gold reserves (Rabinovitch, 2014).
References
Arends, B. (2012, September 5). Why is Putin Stockpiling gold? The Wall Street Journal. Retrieved 7 2, 2014, from http://www.marketwatch.com/story/why-is-putin-stockpiling-gold-2012-09-05
Beechy , T. H., & Conrod , J. E. (1998). Intermediate Acconting. Canada: McGraw-Hill Ryerson Limited. Retrieved 7 2, 2014, from https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=5&cad=rja&uact=8&ved=0CEAQFjAE&url=http%3A%2F%2Fwww.mheducation.ca%2Fcollege%2Fbeechy1%2Fgraphics%2Fbeechy1iab_student%2Fslideshow%2Fsld09.pdf&ei=L4uzU9-rIsKHONCfgLgC&usg=AFQjCNHl5ndTTQyALaDTSs
Hanel, J. (2013, November 18). Colorado seeks money from illegal gold mine: Agency depletes emergency fund cleaning mercury from Mancos tailings. Cortez Journal.com. Retrieved 7 2, 2014, from http://www.cortezjournal.com/article/20131114/NEWS01/131119896/0/Columnists18/Colorado-seeks-money-from-illegal-gold-mine
McWhinnie, E. (2014, March 22). Top 10 nations stockpiling gold. USA Today. Retrieved 7 2, 2014, from http://www.usatoday.com/story/money/business/2014/03/22/wall-st-cheat-sheet-nations-gold/6709493/
Moskowitz , T. J., Ooi, Y. H., & Pedersen , L. H. (2012). Time Series Momentum. Journal of Financial Economics, 104, 228 - 250. Retrieved 7 2, 2014, from https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=7&cad=rja&uact=8&ved=0CFMQFjAG&url=http%3A%2F%2Fpages.stern.nyu.edu%2F~lpederse%2Fpapers%2FTimeSeriesMomentum.pdf&ei=L4uzU9-rIsKHONCfgLgC&usg=AFQjCNG0bIXg-oCDVov97uRjd55P8WAK4Q&sig2=XBcKeJvodou
Newby, E. (2007). Macroeconomic Implications of Gold Reserve Policy of the Bank of England during the Eighteenth Century. Scotland, UK: Center for Dynamic Macroeconomic Analysis. Retrieved 7 2, 2014, from http://www.st-andrews.ac.uk/CDMA//wp0708.pdf
Odean, T. (2013, May 9). The Experts: Should You Keep Cash in Your Portfolio? The Wall Street Journal. Retrieved 7 2, 2014, from http://online.wsj.com/news/articles/SB10001424127887324744104578471740280677464
Rabinovitch, S. (2014, February 11). China's 500-tonne gold gap fuels talk of stockpiling. Commodities. Retrieved 7 2, 2014, from http://www.ft.com/intl/cms/s/0/885b6272-92d4-11e3-9e43-00144feab7de.html#axzz36HyQw2mx
United States Congress. (1976). An assesment of Alternative Economic Stockpiling Policies. Washington, DC: Office of Technology Assesment. Retrieved 7 2, 2014, from https://www.princeton.edu/~ota/disk3//7601.PDF
Waag, I. V. (1993). Allied Military Currency of the Second World War; A Study in Emergency Paper Money. Militaria African Journal Military Studies, 23(2). Retrieved 7 2, 2014, from http://scientiamilitaria.journals.ac.za/pub/article/view/309
