In 1797, the European economy began to encounter problems by using paper money as the primary currency. There was too much worthless credit, and the market was flooded with bits of paper with no meaning or value. It was clear that a gold standard needed to be implemented to instill the necessary controls on money. An economy that is backed by the gold standard is an economy that uses a monetary system in which paper money can be easily exchanged for a fixed amount of gold. In other words, gold backs the value of paper money.
By 1821, England had officially switched to the gold standard, becoming the first country in the world to do so. Other nations soon followed, and by 1900, most players in the international economy were converts to the gold standard. Governments began to stockpile large amounts of gold to settle any trade disparity between nations during difficult times, a practice that exists even today. The 19th century’s dramatic increase in global trade and production brought large discoveries of gold in the Americas, Australia, and South Africa, and at this point in the gold price history, the gold standard had gained its footing well into the next century.
It was the period between 1871 and 1914 in the gold price history that the gold standard ruled the economy of the world. During this period of economic stability, near-ideal political conditions prevailed between different governments as they worked together to improve the economy for the betterment of everyone. However, this golden period could not last and with the outbreak of the Great War in 1914, everything changed forever.
During the Great War, everything that the world economy had taken for granted for the past few centuries was thrown into turmoil. Political alliances changed and disappeared, international debt grew in unsustainable amounts, and local economies suffered. The gold standard could not cope with the economic strain and confidence in this monetary system’s ability to hold through both good and bad times disintegrated, marking a low period in the gold price history. It was determined that the world needed a more flexible monetary system on which to pin its expectations.
The gold supply fell behind the economy’s recovery after the Great War, and at this stage in the gold price history, gold was replaced as the global reserve currency and standard by the British pound sterling and the U.S. dollar. Countries with less economic heft began to stockpile these currencies instead of gold bullion, which resulted in the world’s supply of gold being placed in the reserves of just a few large nations. By 1931, the gold standard was suspended in England, leaving only the United States and France with large gold reserves.
In 1934, to better its struggling economy, the U.S. government decided to reprice gold by increasing the amount of paper money it took to buy one ounce from $20.67/oz to $35.00/oz. This was a major event in gold price history. Since other nations could suddenly get more U.S. dollars for their remaining gold holdings, they instantly sold the bullion over to the U.S. government, effectively allowing the U.S. to corner the gold market. By the end of World War II, the United States had 75% of the world’s monetary gold and the dollar was the only currency still on the gold standard.
During the aftermath of World War II, the enormous amount of gold the U.S. had managed to stockpile over the early part of the century began to dwindle as money tied up in international aid efforts depleted their reserves. By the late 1960s, inflation and an overextended economy reduced the gold standard to a pauper in comparison to its previous glorious gold price history.
Finally and inevitably in 1968, the U.S government’s feeble attempt to boost its economy during 1934 backfired on them. A gold pool that had previously dominated the gold supply amongst the U.S. and a majority of European nations ceased to trade on the London market. The result of this move was the endgame of capitalism: the freedom of the market to determine the price of gold. Gold price history was made. During the period of 1968 to 1971, only a few select banks could afford to trade with the U.S.’s premium gold price of $35/oz. Soon, the death knell tolled for gold convertibility and even the central banks had no further use for the huge stocks of gold they had amassed.
By this time in the gold price history, the gold rate was at US$35. Fast-forward ten years; the price had jumped 2, 485% to US$870 per ounce. According to the rules of a free market, the price of gold is subject to the principle of supply and demand, but more realistically, it is also privy to other external factors such as central banks with huge buying and selling power, economic forces on a national and international scale, conflicts and crises, jewellery demand, and the whims of the industry and investors.
Gold share prices began to rise in the 1970s, creating a bull market for investors because the precious metal could be freely traded both nationally and internationally and it was seen as the safest form of investment during the economic turmoil that most Western nations were facing during this decade in the gold price history. A stagnant market with low growth, high inflation, and a high unemployment rate plagued the economy. With national debt on the rise, gold and other material assets were seen to be the only way wealth could be retained.
If the prime buyers market in the gold price history of the 1970s can be explained by the end of the gold standard, new rules of trade, and economic decline, then the ensuing bear market of the next twenty years can be explained by the eventual end of the economic stagflation in the creation of President Bill Clinton’s so-called ‘New Economy.’ This period was marked by an extraordinarily stable economy, low inflation rates, and a rejuvenation of the employment figures. The market transitioned from an industry that revolved around manufacture to one that emphasised new technology and service-based industries.
In this period of the gold price history, gold investors that could have benefited from a profit margin of 2500% due to the gold price jump during the seventies would have experienced a decrease of 60% if they had bought gold in January 1980 for a rate of US$677 and then attempted to sell ten years later when the gold price rested at only US$283 an ounce in December, 2000. Sadly, it was a bear market for gold investors.
We are now climbing toward a peak in the gold price history where the market is seeing the gold rate rise from US$265 per ounce at the beginning of the 21st century to more than US$1400 ten years later. Contrasting dramatically with the bear market of the previous twenty years, this current bull market is indicative of a new age of prime gold investment in the gold price history.
This new rise in the gold rate can be attributed to several factors that have several things in common with the previous bull market during the seventies.
Firstly, it can be linked to a reduction in the gold supply. There has been a 10% drop in global gold production within the last decade, and this has been matched with an increase in jewellery demand due to China and India’s newly found economic clout. Secondly, the central banks that were so eager to unload their gold reserved during the last century have renewed their interest in large amounts of gold bullion. And lastly, the U.S. economy is slipping back into a state of decline with increasing national debt and an ever-weakening US dollar. The United States is still recovering from the Wall Street crash of 2008, during which the demand for physical investments rose again.
The rises and falls in the gold price history have surely shaped the world’s economy since the very early days of civilisation. As the figures show, this current market is an exciting time for the gold price history and is an ideal time to invest in gold as insurance for your future.