With an annual average price growth of almost 9% since the start of the
1970s it is little wonder that astute investors continue to hold the precious
metal in their portfolios.
In this blog we look at what has moved the gold price since the pivotal
year of 1971.
Prior to this date, the price of gold had not moved substantially for
hundreds of years.
This can be attributed to the gold standard, an international monetary
system subscribed to by trading nations during the 19th and much
of the 20th centuries.
Essentially, it required each currency to be redeemable for gold and for
the price of gold to be fixed. In 1900 the gold price was set at USD 20.67
per ounce. In 1933 the price was amended to USD 35.00.
But in 1971, amid stagflation (economic stagnation accompanied by
inflation), use of gold to back the US dollar was abandoned in favour of ‘fiat’
or government-issued currency. Most major countries adopted a floating
exchange rate system – and the price of gold was henceforth determined by
market forces.
In 1976 the price of gold shot up to USD 120 and by 1980 it was at a
record high of USD 850 per ounce. The 1980 rally was driven by a raft of
financial and geopolitical crises – the Iranian revolution, the oil price
spike and the Soviet invasion of Afghanistan.
In resorting to gold, investors demonstrated their faith in its historical
role as a safe haven in difficult and dangerous times.
As the decade progressed, Western countries gradually reined in inflation
and unemployment. Gold fell out of favour somewhat as the New York Stock
Exchange index nearly quadrupled, going from just over 500 to almost 2,000.
Amid strong economic growth in the 1990s, interest in gold declined
further and at less than USD 300 an ounce at the beginning of the new
century, the investment case for gold appeared weak.
Astonishingly, though, the metal was about to embark on its most powerful
bull run in history. Over the ensuing decade the price was destined to
increase eightfold, peaking at just over USD 1,900 an ounce in 2011.
The backdrop to this incredible rise was one of international emergencies
and financial turmoil. Key events of the period include the 9/11 terrorist
attacks, the invasion of Iraq, and the granddaddy of them all from gold’s
perspective, the financial meltdown of 2007, the ensuing global financial
crisis and efforts to contain its worst impacts through quantitative easing.
In reaction, seasoned investors sought gold as a hedge instrument – a
position with the potential to offset losses in other assets within an
investment portfolio.
At the same time, central banks began a buying spree, with China for
example raising its gold reserves by three quarters to 1,054
tonnes between 2003 and 2009. (Indeed, China has maintained its buying
and is now estimated to have over 20,000 tonnes though the exact amount
remains a state secret).
And with the hype around the rising gold price, a large number of
speculators also jumped on the precious metal bandwagon.
Where are we today?
From its peak, gold declined to around USD 1,000 at the end of 2015.
From April 2013 until just recently, there has been a lack of significant
volatility in the gold price, which has traded in a band of between USD 1,000
- 1,450 per ounce. Even at this level, however, gold is at historically high
levels.
In 2016 the gold price began trending higher again (and in Australian
dollar terms has continued to post new highs since June 2019).
Some commentators see this as the beginning of a new bull market for gold.
The factors they use for this argument include:
• Gold has re-established its reputation as a safe
haven after doubters appeared to question this in recent years.
• Interest rates remain low and appear to be going
lower still, encouraging investors to chase returns in shares and property
which may be reaching bubble territory in some parts of the developed world.
• Geopolitical and trade tensions remain high –
Brexit, the Iranian nuclear deal and US-China trade talks are among key
issues contributing to current disquiet.
• Central banks worldwide continue to signal their
concern by buying record levels of gold.
Without doubt, this is a powerful mix of factors with the potential to
continue gold’s exhilarating ride since 1971.
