A Brief Recent History of Gold
- On August 15th, 1971 President Nixon closed the gold redemption window. Until that time, the U.S. Treasury allowed foreign central banks to exchange the dollars they obtained from trade and investment for physical gold. Gold was $43.15 an ounce at the time. Economic stagflation ensued and the gold price soared.
- On January 21, 1980, gold closed at $850 an ounce. That was the market top for decades.
- S. inflation peaked at 14.8 % in March 1980. The Federal Reserve board led by Paul Volcker raised the federal funds rate, which had averaged 11.2% in 1979, to a peak of 20% in June, 1981. Raising interest rates above the rate of inflation convinced markets that inflation would fall and that the Fed had everything under control. Disinflation followed.
- On May 7, 1999, the Bank of England announced plans to dump its gold for other assets that would earn a higher rate of interest. The price of gold was at US$282.40 per ounce at that time. The advance notice of substantial sales drove the price of gold down by 10% by the time of the first auction on July 6, 1999. With many gold traders shorting, gold reached a low point of US$252.80 on July 20. This is frequently called “Brown’s Bottom” after Gordon Brown, then the U.K. Chancellor of the Exchequer.
- Between 2000 and 2006 gold soared in conjunction with a collapse in the NASDAQ (down 83% from top to bottom) and the creation of a massive inflationary housing bubble. Chairman Alan Greenspan’s Fed hiked interest rates at 17 consecutive meetings while gold rose to a new all-time high. The housing bubble burst in 2007.
- On April 17, 2008, gold touched $956.20 and then collapsed along with everything else in the great recession. Markets scrambled to meet the demand for dollars to pay down debt and maintain liquidity as interest rates soared and banks refused to lend.
- On November 13, 2008, gold touched $698.20 at the height of the liquidity crisis. That bottom has not been approached since. Gold recovered from the recession before any other asset class and proceeded to climb quickly as investors continued to flee risk by selling financial assets such as stocks and bonds.
- On August 23, 2011, Gold peaked at $1923.70 with a European Debt Crisisunderway and the Fed involved in a massive program of Quantitative Easing.
- On July 26, 2012, Mario Draghi made his famous “Whatever It Takes” speech. “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” Gold closed that day at $1614.
- On September 6, 2012, in a further attempt to calm the European Debt Crisis, the ECB announced unlimited funding for Eurozone countries including sovereign state bailouts through the EFSF/ESM and purchases of sovereign bonds to lower yields through the Outright Monetary Transactions (OMT) program.
- On December 17, 2015, gold touched $1046.80, establishing a new bottom well above the October 2008 low. At that time, numerous ‘experts’ said that gold would fall to $800, then $600. Some suggested it would fall all the way back to $250.
- In fact, the gold price has recovered somewhat as risk perceptions rise. The Fed’s QE has not accelerated economic growth in the U.S. (the ‘escape velocity’ most economists expected has never arrived) and the ECB has not succeeded in solving the European problems of slow growth, a highly leveraged banking system and political instability.
The historical facts demonstrate that gold does not rise and fall with interest rates, jewellery demand in India or other widely believed nonsense. Rather, gold has moved in conjunction with perceptions of risk and whether or not the Fed and central banks have everything under control.