Short and Sweet

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When the United States owned
most of the gold on Earth

Chart courtesy of GoldChartsRUs

Few Americans know that just after World War II the United States owned most of the official sector gold bullion on earth – about 22,000 metric tonnes or 80% of the world total. As part of the 1944 Bretton Woods Agreement, though, the United States allowed unrestricted redemptions from its reserves at the benchmark rate of $35 per ounce. In the 1960s, a group of European nation-states, led by Germany and France, got the idea that U.S. trade and fiscal deficits had undermined the dollar, making gold a bargain at the $35 benchmark price.

Steadily over the next decade, they exchanged dollars for gold at the U.S. Treasury’s gold window. By the early 1970s, 14,000 tonnes of gold – or 64% of the stockpile – had departed the U.S. Treasury never to return. The transfer of gold finally ended in 1971 when President Nixon halted redemptions, devalued the dollar and freed the greenback to float against other currencies.

The era of global fiat money with the dollar as its centerpiece had begun.  Gold went from its official role as backing the dollar to one as a hedge among private investors against its depreciation. Since that role reversal, gold has risen in fits and starts from the $35 official benchmark in 1971 to a peak of over $1900 in 2011.  It is trading now in the $1300 range. For the central banks and private investors who made those original redemptions at $35 per ounce, the gains have been extraordinary – over 3700% at current prices or 7.5% annually compounded over the 47-year year period.  Simultaneously, the dollar lost 84% of its purchasing power.

For those who think the benefits of gold ownership are largely passed in the modern age, the chart below showing gold’s average annual prices since 1971 serves as a strong argument against such casual assumptions. Though gold has risen for different reasons under a variety of circumstances, the one quality it has demonstrated consistently is its role as a safe-haven.  When the next crisis rolls around, no matter the catalyst, gold will likely be among the first places investors flee to find protection. In fact, to a large degree, central banks have already once again begun to accumulate gold for essentially the same reasons they did in the 1960s

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