Gold's prices in modern times

For ourselves, the people of the 21st century, it seems natural that the price of gold fluctuates. But throughout almost all of history there was no "gold price" denominated in money -  because gold was money.

Golden money

This "gold price", or at least the price for gold as denominated in US dollars. can be said to have been in existence only since 1973 when, finally, the postwar period in terms of the world’s economy ended. That (the postwar) period was ruled by what was called the Breton Woods System - the name deriving from the place in which in 1944 the Allies set the rules for the postwar economy.

For many centuries a currency „competition” was ongoing in the world’s economy, and the value of money was determined by the volume and quality of gold contained in a coin. Even paper money issued by states was directly connected to gold or silver. The end of 19th century was a period economically dominated by gold or bimetal money. States issued their own currencies and these were redeemable on demand by specified quantities of gold or gold and silver. Due to the mutual volatility of the values of these metals, the bimetal system was replaced by the more stable gold money system.  In 1900, in the USA, the Gold Standard Act was passed, fixing the value of the US dollar at 1.505 g - which made troy ounce (around 31.1 g.) equal $20.67.

Even before then, in Europe a gold system had been created by the incepion of the Latin Monetary Union which had already suspended the bimatelic system (in 1878). Within the confines of this union some West and South European states minted their own currency but each unit (i.e. Italian lira or French frank) was equal: to 0.290322 g. of gold.

The definitive end of the European gold money system occurred during WWI when states started to issue paper money in large quantites in order to pay workers in arms factories and the soldiers on the frontlines. Gold was used in international transactions and precious metals which had been kept in reserves turned up on the market. This caused spectacular postwar inflation  - which in Germany and Poland took the form of hyperinflation.

During the twenty year inter-war period some states tried to go back to a system based partly on the reedemability of currencies by gold. Among those countries was Poland which, after Władysław Grabski's reforms, backed the Polish zloty with gold and foreign currencies. Poland couldn't really afford full convertibility although the official standard of zł 1 = 0.2903 g. of gold remained until the outbreak of WWI.

The only country which retained full convertibility was the USA where the price of gold remained fixed at $ 20.67/oz.

The Great Crisis and Bretton Woods

In 1929 the greatest world economic crisis which has ever taken place (so far) began. We won't analyse all its elements here but let's point out one of President F. Roosevelt's acts in relation to it. This was Executive Order 6102. The US government confiscated all of the citizen's gold and concurrently devalued the dollar to a level of $35/ounce: i.e. 0.888 g. of gold for each dollar.

WWII ushered in the next financial crisis which had a similar mechanism to that of the WWI period twenty years earlier. Postwar order was established by the Breton Woods agreement. The dollar became the world’s main currency, fully redeemable to gold with the value as set by Roosevelt in 1933. The value of other currencies was set in relation to the dollar, and governments, for political reasons, tried to mitigate fluctuations as much as possible. This led to powerful disturbances in the balance of payments of many countries and problems with monetary policy.

From 1968 until 1971, the US government quite often changed the gold-dollar parity. The cost of the Vietnam War and the huge economic disturbances caused by the Oil Crisis significantly contributed to these issues. In effect, stagflation occured: i.e., high inflation combined with a lack of economic growth. There were so many dollars in circulation that their convertibility to gold became an impossibility, and on August 15. 1971 this convertibility was suspended with the price of an ounce of gold being  $42.22. The definitive end of the Breton Woods system was brought about by the freeing of the course of the dollar in 1973 and the opt-out in reference to gold.

Only since 1973 have we been able to talk about the price of gold denominated in dollars. However, it is possible to create a chart of gold prices reaching much further back in time - even to the beginning of the 20th century. However, such charts depict nominal prices until the 70s, before that cut-off point they just show horizontal straight lines (for each currency).

The Gold Exchange Rate Freed

After the gold exchange rate was freed, as expected, it suddenly soared. By the end of 1974, it had reached the level of $183 (per ounce). This hadn’t been hard to foresee. Long term stagflation, economic and financial crises, the rapid growth of oil prices and the Yom Kippur war in the Middle East caused panic and a run on gold – because it was considered a safe haven.

A correction subsequently occurred, in 1976, when prices fell during a six month period to below $110. However, the world situation still wasn't good, and in the second half of the year the correction ended and prices soared again. Even the International Monetary Fund's efforts (selling in the period 1976-1980 1/6 of its gold reserves) didn't make a differance.

In 1979 Khomeini's revolution broke out in Iran and that caused a second oil crisis which pushed gold prices to record heights. In January 1980, these prices reached $678. In September 1980, gold still cost $675, but Reaganeconomics then solved a lot the USA’s economic problems.

Record low interest rates stimulated the process of capital transfers to the capital market and the lack of major economic and geopolitical problems calmed the market down. Due to the fall of communism, American political scientist Francis Fukuyama wrote a book entitled "The End of History" in which he predicted the cessation of the occurance of great historical episodes and the gradual shift of the whole world to the Western liberal and democratic political model. What a mistake. However, these two decades of phony optimism did cause stagnation in gold prices; these fluctuated in the range $300 to $400. In June 1999, the gold price was merely $256 an ounce. But those who had trusted in gold had been proved to be right.

21st Century

A signal for a new spike in gold prices was the turn of century and the accompanying, so called, „Dot-com crisis” in which the internet start-up bubble burst and triggered another financial crisis. On 11th September 2001, Al-kaida  attacked the World Trade Centre and, as a result,  President George W. Bush proclaimed the war on terror. In pursuit of this war, the USA then invaded Aganistan and Iraq, from where, despite all efforts, it still seems impossible  to withdraw.

The challenges of the new millenium have spectacularly demolished Fukuyama's theory and reignited concerns for the fate of the world and the world’s economy. Even the relatively good growth in this economy throughout the years 2002-2008 didn't hamper the surge in gold prices. The exchange rate increase was caused by the rapidly growing arms expenditure of the USA, which made the huge US budget deficit even bigger.

In May 2006, the gold price reached $675 and then the next shock occurred. In 2007, the mortgage crisis broke out in the US market and investors started to run from the sinking ship of the real estate and capital markets and return to the safe haven of gold. In March 2008, an ounce of gold cost $968 but then the situation started to improve. New heights were reached on the stock market and the price of gold dropped as quickly as it had soared earlier, reaching finally, in October, $ 731.

The next turn of the screw was that, in September 2008, Lehmann Brothers, one of the biggest US investment banks collapsed. This caused a huge shock and a second wave of crises which pushed in turn gold prices up to new heights - although the psychological barrier of $2000 an ounce was not crosssed. Eventually the price reached  $1902,30 - on 5th October 2011.

Since that time gold prices have dropped. The year 2013 proved to be critical in that respect; in the spring of that year the gold price dropped from a level of $1600 to only $1200. Since then the exchange rate has fluctuated more or less in the range of $ 1200-1400 - this year, though, the price went below slightly this lower level. Where are gold prices going to go next? Of course, no-one can foresee this in the short or medium term. But in the long term, as always, gold remains a safe haven.

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Krzysztof Krzemień