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Famous Gold Moves in History
Introduction
G
old is unlike any other metal in the world, for the simple
fact that it is not-quite a commodity, and not-quite a
currency, although for much of recorded history it was
practically synonymous with money. Even today1, unlike many
other precious metals, gold’s usage is dominated by investing
applications: 40% of the new gold produced every year is used in
investments, 50% is used in jewelry, and 10% finds its way into
industrial applications. Although headlines on gold price moves
are a familiar sight today, it’s easy to forget that gold price moves
are a relatively new phenomenon.
For centuries many European countries as well as the United
States made use of gold pegs for their respective currencies,
ensuring that a fixed amount of the precious yellow metal could
be exchanged for a fixed amount of currency, and vice-versa.
This arrangement produced some measure of stability but gave
rise to some interesting price dislocations as well. These were
merely harbingers of bigger price moves yet to come. The system
remained more or less in place until after World War II, when
the new Bretton Woods system pegged the US dollar to a fixed
exchange rate of US$35 per troy ounce (ozt).
The purpose of this article is to examine in detail some of the
more notable movements in gold prices throughout history.
Gold Pegs & Bretton Woods
Gold played a key role in international monetary transactions
throughout the 19th and early 20th centuries, as it was used
to back currencies. The value of a currency internationally was
measured by its fixed relationship to gold, and gold was used to
settle international accounts. This system had its weaknesses,
however. For starters, the world money supply was necessarily
constrained by the amount of gold in circulation. In order to print
more money, governments would need to buy or mine more gold.
During World War II, there was not enough gold in circulation to
satisfy the growing demands of burgeoning international trade
and investment.
In the hopes of resolving this problem and setting the
groundwork to rebuild the postwar international economic
system, 730 delegates from all 44 nations gathered in Bretton
Woods, New Hampshire in July 1944. Once World War II had
ended and after a sufficient number of countries had ratified the
Bretton Woods agreement, the new system came into effect. The
Bretton Woods rules attempted to encourage an open system
of international trade, with signatory nations committed to see
to the convertibility of their respective currencies into other
currencies. Crucially, it provided for a system of fixed exchange
rates resting on the U.S. dollar as the world reserve currency,
which would notionally replace gold as the reserve unit. However,
to encourage confidence in the U.S. dollar, the United States
pegged the dollar to gold at $35 per troy ounce.
It proved somewhat difficult to maintain a fixed peg. In the 1950s
as global trade rapidly grew, the U.S. held about $26 billion in
gold reserves, nearly 65% of all global reserves. As the United
States balance of payments swung negative, the American
government was forced to take drastic actions to maintain the
international convertibility of gold by placing import quotas on
oil and other trade outflow restrictions. An important wrinkle to
the $35 gold peg was the fact that it was not intended to be “fully
convertible”—the free market price for gold could still somewhat
fluctuate around $35. Rather, the $35 gold peg was intended to
allow central banks around the world to buy and sell gold to each
other at a fixed rate. If the free market price of gold fluctuated
wildly beyond the peg, decisive action would have to be taken
to affect a change in price. For example, the free market price
of gold spiked to as high as $40/ounce in response to the Cuban
Missile Crisis in 1962.
The Nixon Shock
As the postwar economies of Germany and Japan recovered from
1950 to 1969, the US’s contribution to global economic output
plummeted, from 35% to 27%. By the 1960s the U.S. dollar had
become increasingly overvalued. Many foreign countries saw the
Bretton Woods system as unfair and asymmetric, with non-US
citizens subsidizing American multinationals and propping up
American living standards. In May of 1971, West Germany left the
1 As of June 20th, 2016
Bretton Woods system, as it was unwilling to devalue its currency,
the Deutsche Mark. Its economy strengthened as a result, even
as the dollar dropped 7.5% against the Deutsche Mark. Other
countries including France and Switzerland converted millions
of dollars into gold: $50 million and $191 million, respectively.
On August 9th, 1971 Switzerland left the Bretton Woods system.
2 | Famous Gold Moves in History
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On August 15th, 1971, with pressure mounting for the U.S. to
leave Bretton Woods and the value of the U.S. dollar dropping
relative to European currencies, the United States unilaterally
cancelled the convertibility of the US dollar to gold. This brought
an end to the nearly three-decades long postwar Bretton Woods
regime and effectively transformed the U.S. dollar into a fiat
currency. Although Richard Nixon announced his intent to
reinstate gold convertibility after reforms to the Bretton Woods
system, all attempts at reform ended in failure. Today’s system of
freely floating fiat currencies is a direct result.
(to ensure American products would not be at a disadvantage)
and issued an executive order imposing a 90-day freeze on wages
and prices in the hopes of countering inflation. This was the first
enactment of price and wage controls since World War II.
True to its name, the Nixon Shock caused the price of gold to
rocket to around $100 per ounce, reflecting the underlying
fundamentals of the period. Much like a freely-floating currency,
gold had become a freely-priced commodity, subject to the whims
of the market. For gold, things would never be the same again.
In conjunction with suspending the convertibility of the U.S.
dollar to gold, Nixon enacted a temporary 10% import surcharge
Gold price during and after the US Dollar peg
Source: Bloomberg, ETF Securities. Data as of 6/17/2016. Past performance does not guarantee future results.
Gold price (USD/ozt)
200
180
160
140
120
100
80
60
40
20
0
1967
1968
1969
1970
1971
1972
1973
1974
1975
Pent up gold demand led to a rise in gold prices after the United States unilaterally cancelled the convertibility of the US dollar to
gold on August 15, 1971.
1971 – 1981
In macroeconomic terms, the 1970s and early 80s were a
turbulent period in the United States. Economic growth was
weak, helping to drive unemployment to nearly ten percent,
while the Arab oil embargo contributed to a slump that persisted
until the mid-1970s. In an attempt to stimulate the economy,
the Fed instituted a number of easy money policies including
low interest rates which stoked inflation while doing little to
combat unemployment. Under new leadership the Fed would
later reverse itself, raising interest rates as high as 20%. This was
a period characterized by Stagflation, a stagnating economy with
inflation and rising interest rates, which persisted through the
final years of the Carter administration.
Perhaps unsurprisingly, the 1970s and early 80s were a turbulent
period for gold prices as well. Driven by spikes in oil prices and
inflationary concerns, the price of gold reached $677.97/ounce
by January 1980, or $2066.45/ounce in June 2016 CPI inflationadjusted terms.2 This rush to gold was exacerbated by geopolitical
issues, including the hostage crisis in Iran.
2 http://www.macrotrends.net/1333/historical-gold-prices-100-year-chart
3 | Famous Gold Moves in History
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Nominal gold prices versus real gold prices
Source: Bloomberg, ETF Securities. Data as of 5/31/2016. Past performance does not guarantee future results.
2,000
1,800
Gold price (USD/troy oz)
1,600
Inflation Adjusted Gold Price (USD/troy oz)
1,400
1,200
1,000
800
600
400
200
0
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
Gold prices and inflation-adjusted gold prices markedly diverged over time after the United States unilaterally dropped the gold peg.
The 1980s and 90s
2004 – 2007
Gold prices remained relatively strong throughout the 1980s and
then fell in the 90s as fiscal deficits in the United States came down
and as emerging markets moved more and more to the forefront.
As the economic story continued to improve throughout the
nineties and as the fall of the Soviet Union brought former Soviet
countries’ markets online, the demand for gold continued to
decline. A strengthening dollar and a booming economy put
continued downward pressure on gold prices. By August 1999,
with the stock market reaching new highs, gold was at its lowest
price in decades, just $256.08/ounce, or $364.24/ounce in CPIinflation-adjusted terms. It continued more or less sideways until
around 2004.
2003 and 2004 saw the first notable spikes in gold demand
which continued to surge through 2007. This rally was largely
attributable to a 2004 rule change in China which allowed
private citizens to own gold for the first time in nearly fifty
years (the Chinese Communist Party first banned private gold
ownership in 1950). This pent-up demand fueled a rise in gold
prices. From $413.79/ounce in January 2004 ($529.65/ounce CPIinflation-adjusted), gold rocketed to $631.17/ounce by January
2007 ($739.10/ounce CPI-inflation adjusted).
At the same time that gold ownership was being liberalized in
China, Western investors were gaining easier access to gold
through physically backed gold ETFs, which also helped drive
demand.
Introduction of gold exchange traded funds helped capture additional investment demand
Source: Bloomberg, ETF Securities. Data as of 6/17/2016.
3,000
Total Known ETF holdings of Gold (metric tonnes)
2,500
2,000
1,500
1,000
500
0
Oct 03
Oct 04
Oct 05
Oct 06
Oct 07
Oct 08
Oct 09
Oct 10
Oct 11
Oct 12
Oct 13
Oct 14
Oct 15
4 | Famous Gold Moves in History
2008 – 2011
The aforementioned price drivers—gold demand in China and
the democratization of gold access in the West—remained in
play throughout the 2008-2011 period, but there were dark
clouds on the horizon for investors. Precipitated by a number of
macroeconomic factors, the 2008 financial crisis is considered by
many to have been the worst economic downturn since the Great
Depression. As the U.S. housing bubble burst it caused the values
of mortgage-backed securities to drop precipitously, which in
turn triggered a global liquidity crisis. Amidst worries that it
would collapse, Bear Stearns was sold to JP Morgan in a fire-sale
while many other major institutions were acquired under duress
or failed outright, including Lehman Brothers, Merrill Lynch,
Fannie Mae, Freddie Mac, and many others.
Central banks worldwide responded to the crisis with record
expansion of their balance sheets, seeking to counteract the
downward spirals of their respective economies through
quantitative easing, giving rise to fears of heightened inflation.
The sovereign debt crises that unfolded in Portugal, Ireland,
Spain, Greece, and Cyprus, as well as the U.S. debt downgrade
by Standard & Poor’s in August of 2011 did little to calm rattled
investors.
In the context of an imploding financial system, many investors
rushed to the perceived safety of gold. Its price rose accordingly.
Central banks also got in on the gold-buying frenzy, seeking
to bolster their weakening balance sheets and becoming net
purchasers of gold in the process. While gold was priced at
$631.17/ounce ($739.10/ounce CPI-inflation-adjusted) in January
of 2007, by the height of the financial crisis in January of 2010
it had nearly doubled, rising to $1078.50/ounce ($1179.88/ounce
CPI-inflation-adjusted).
The price of gold peaked in August 2011 at $1825.00/ounce
($1910.78 CPI-inflation-adjusted), or nearly triple its pre-financial
crisis price.
2011 – 2012
Central banks throughout the world, most notably the People’s
Bank of China, continued to participate in gold markets as net
purchasers, whereas before they had frequently participated
as net suppliers. 2012 saw positive returns for gold, however
there were also record outflows and redemptions from Western
investors where gold prices saw a collapse of around 31%. This
price drop is partially attributable to the anticipation of rising
interest rates from the Fed. Interestingly, as these redemptions
continued, record demand was registered even as prices fell, with
increasing numbers of Eastern investors coming online to buy
gold bullion.
2013 – 2016
In 2013 about 800 metric tons were redeemed out of gold
products. However, fueled by strong demand in East Asia, there
were also record flows out of London vaults and into the East.
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In general, 2014, ’15, and ’16 saw somewhat negative sentiment
on gold among Western investors as the economy recovered and
equity markets continued to strengthen.
Today, gold continues to serve a vital role as a portfolio hedge,
especially in the face of episodic market volatility, continued
global uncertainty, and improving fundamentals. It has been one
of the few bright spots in 2016, both among broader risk assets
and within commodities. The start of 2016 saw the demand for
gold return after three years of net outflows from gold products.
Gold has also done well in the context of a somewhat weakened
dollar, as it is historically negatively correlated to the dollar’s
performance. If the Fed refrains from hiking interest rates
throughout the rest of the year, gold could also benefit—it tends
to do better in low interest rate environments. On the other hand,
should the Fed prove more hawkish, gold prices may suffer as
interest rates rise.
Conclusion
If this article’s examination of historic price moves in gold has
taught us anything, it’s that bad news for the economy is typically
good news for gold. As soon as gold was decoupled from its
Bretton Woods dollar peg, it skyrocketed, reflecting a great deal
of pent-up demand. In the 1970s and 80s, as stagflation reigned
and political turmoil rocked the Middle East, gold rallied to
new heights. In the 90s, as the American economy strengthened
and with stocks notching record gains, gold did not do as well,
falling to its lowest price per ounce in decades; but this didn’t last
long. Liberalized gold ownership policies in China along with
greater Western access to gold bullion in the form of ETFs set the
stage for a take-off in gold prices from 2004 to 2007. The global
financial crisis, while terrible for many investors, economies,
and homeowners, was overwhelmingly positive for gold, which
many investors rushed to as a potential safe haven. Perhaps it’s
no surprise that gold reached its all-time high at the peak of
the financial crisis when a positive outcome seemed far from
guaranteed.
Although gold has since somewhat declined from its highs, it
remains an invaluable tail-risk hedge. The next time a black swan
event, natural disaster, or economic crisis strikes, an allocation
to gold may help soften the blow.
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Important Information
The ETFS Gold Trust is not an investment company registered under the Investment Company Act of 1940
or a commodity pool for purposes of the Commodity Exchange Act. Shares of the Gold Trust are not subject
to the same regulatory requirements as mutual funds. These investments are not suitable for all investors.
Trusts focusing on a single commodity generally experience greater volatility. There are special risks
associated with short selling and margin investing.
Commodities and futures generally are volatile and are not suitable for all investors. Trusts focusing on
a single commodity generally experience greater volatility. Please refer to the prospectus for complete
information regarding all risks associated with the Trusts.
The value of the Shares relates directly to the value of the precious metal held by the Trust and fluctuations in the price could
materially adversely affect investment in the Shares. Several factors may affect the price of precious metals, including:
•
A change in economic conditions, such as a recession, can adversely affect the price of the precious metal held by the Trust.
Some metals are used in a wide range of industrial applications, and an economic downturn could have a negative impact on its
demand and, consequently, its price and the price of the Shares;
•
Investors’ expectations with respect to the rate of inflation;
•
Currency exchange rates;
•
Interest rates;
•
Investment and trading activities of hedge funds and commodity funds; and
•
Global or regional political, economic or financial events and situations. Should there be an increase in the level of hedge activity
of the precious metal held by the trust or producing companies, it could cause a decline in world precious metal prices, adversely
affecting the price of the Shares.
Also, should the speculative community take a negative view towards gold, it could cause a decline in world gold price, negatively
impacting the price of the Shares.
There is risk that part or all of the Trusts’ physical gold could be lost, damaged or stolen. Failure by the Custodian or Sub-Custodian
to exercise due care in the safekeeping of gold held by the Trust could result in a loss to the Trust. The Trust will not insure its gold
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held by the custodian on behalf of the Trust. Consequently, a loss may be suffered with respect to the Trust’s gold that is not covered
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Investors buy and sell shares on a secondary market (i.e., not directly from trust). Only market makers or “authorized participants”
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Fed – The Federal Reserve System, also known as the Fed, regulates the U.S. monetary and financial system.
CPI inflation-adjusted terms – The consumer price index (CPI) is a measure that examines the weighted average of prices of a basket
of consumer goods and services. The inflation-adjusted return is the measure of return that takes into account the time period's
inflation rate and reveals the return on an investment after removing the effects of inflation.
Stagflation – A condition of slow economic growth and relatively high unemployment accompanied by rising prices, or inflation, or
inflation and a decline in Gross Domestic Product (GDP).
ETFs – An exchange-traded fund (ETF) is an investment fund traded on stock exchanges, much like stocks. An ETF holds assets such
as stocks, commodities, or bonds, and trades close to its net asset value over the course of the trading day.
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Black swan event – An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely
difficult to predict.
Standard & Poor’s – Standard & Poor's Financial Services LLC (S&P) is an American financial services company. It is a division of
McGraw Hill Financial that publishes financial research and analysis on stocks and bonds.
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