The price of a fine
suit of men's clothes can be used to show anyone who is not familiar with
the price history of gold just how very cheap gold is today. With an ounce
of gold, a man could buy a fine suit of clothes in the time of Shakespeare,
in that of Beethoven and Jefferson, and in the Depression of the 1930's.
In fact, this statement was still true in the 1980's, but not in the late
1990's. The suit standard now implies a gold price of perhaps $1,000 per
troy ounce. Today, a really good man's suit can easily cost 4 ounces of
gold, and that is without a vest, which once was standard (Forbes, 1998).
Increases in gold price have
had a good basis of precedent in history. During the period from 1344 to
1717, the price for gold almost quadrupled, reaching the equivalent of
$20.67 per ounce. That price was maintained for more than 200 years until
the enactment of the Gold Reserve Act, which increased it to $35 per ounce,
on January 30, 1934. Pressure for still another increase in price gathered
momentum less than 15 years later. Prices as high as $105 per ounce had
been proposed, and world trade brought prices up to $70 per ounce. (Colorado
School of Mines, 1959).
In November 1961, the London
gold pool, in which central banks of the United States and seven other
nations agreed to buy and sell gold to support the $35-per-ounce price,
was established (Ryan and McBreen, 1963, p. 607). On March 17, 1968, the
governors of the member central banks announced that they would no longer
buy and sell gold in the private market, but would sell gold to each other
for $35 per ounce. Thus, a two-tier market was establishedan official
market and a private marketin which the price was determined by supply
and demand (Ryan, 1970, p. 535).
Following the establishment
of the two-tier price system, a fixed price of $35 per ounce for official
monetary transactions and a floating market price for private transactions,
the U.S. Government asked Engelhard Minerals and Chemicals Corp. (known
today as Engelhard Corp.), to quote a daily price.
Engelhard initiated a buying
quotationthe lowest price at which it could obtain sufficient gold of
99.95% purity to meet its requirements. A selling quotation $0.60 above
the buying price, later reduced to $0.40, was also established (Ryan, 1970,
p. 535). Thus, the basis for the average domestic market price for gold
shown in the table was established.
On August 15, 1971, the President
announced the suspension of convertibility of dollars into gold (West,
1973, p. 540). Following provisions of Public Law 92-268, the Par Value
Modification Act, enacted March 31, 1972, the official price of gold was
increased to $38 per ounce on May 8, 1972 (West, 1975, p. 557).
Following amendments to the
Par Value Modification Act contained in Public Law 93-110, enacted on September
21, 1973, the dollar's par value was devalued by 10%, to 0.829848 Special
Drawing Rights (a unit of account in the IMF). This fixed the official
price of gold at $42.22 per ounce effective at 12:01 a.m., October 18,
1973. That price remains unchanged. The two-tier pricing system was terminated
on November 13, 1973 (West, 1975, p.560).
Following provisions of Public
Law 93-373, enacted August 14, 1974, the President was given the authority
to repeal the prohibition on the holding of gold by private citizens, and
effective December 31, 1974, the prohibition was repealed (West, 1976,
Gold occupies a unique position
among the world's commodities; it is an internationally traded commodity
and a long-established, universally acceptable storehouse of value, considered
by many people worldwide to be superior to fiat paper currencies with fleeting
longevity or fluctuating unpredictable value. It has been said many times
that gold is forever; its high intrinsic and monetary value usually dictates
that, in time, most of it will be recycled to serve again. Because of its
historically high value, much of the gold mined throughout history is still
in circulation in one form or another (Lucas, 1993, p. 505).
As a consequence of the dual
roles played by gold, as commodity and as money, its price cannot be viewed
as one would view the price of other goods or services in a free market.
Gold also cannot be viewed strictly from the standpoint of the U.S. market
alone because international political and economic events that may influence
the market for gold as a commodity may be outweighed by developments perceived
to favor gold as a medium of exchange.
During 1969 and 1970 the
United States experienced a mild recession, while the Republic of South
Africa was permitted to sell gold to the IMF at $35 per ounce or less to
meet its foreign exchange needs (Hoyt, 1970, p. 521).
By December 1971, the U.S.
dollar had been devalued by 7.9% per exchange agreements reached during
the Smithsonian Accords in Washington, DC (West, 1973, p. 539-540). Affected
by previous year's devaluation, the official U.S. gold price was raised
to $38 per ounce on May 8, 1972; speculative buying was encouraged by monetary51
policy changes made by the European Economic Community and by restricted
supplies of newly mined gold (West, 1974, p. 567).
In 1973, the gold market
was influenced by a weakening and devaluation of the U.S. dollar, lowered
confidence in currency values, higher inflation rates, unsettled world
trade, and, for the third consecutive year, lower mine production. The
official U.S. gold price was increased to $42.22 per ounce on September
21. An embargo was begun on petroleum shipments to the United States by
OPEC in mid-October. The two-tier gold price system, begun in 1968, was
terminated (West, 1975, p. 557).
The OPEC embargo contributed
to rising oil prices, worldwide inflation, and general economic uncertainty
1974. Gold prices rose on
speculation near yearend, pending the yearend removal of restrictions on
U.S. citizens holding gold. The gold price trend was reversed in December
by the U.S. Treasury's announcement that it would offer 2 million ounces
of Treasury gold for public sale beginning on January 6, 1975 (West, 1976,
p. 603). Investor and speculator interest was diminished by the announcement
by the IMF that it would sell 25 million ounces of gold on the open market
beginning in 1976. The Treasury, however, was able to sell 1.25 million
ounces from its gold stock during 1975 (West, 1977, p. 669).
Monthly IMF auctions were
begun in midyear 1976 to provide capital for low-interest loans to developing
countries. The IMF planned to sell a total of one-sixth of its gold stocks,
or 25 million ounces, over a 5-year period, and planned to restore an equal
portion to member countries. In addition, a reduced inflation outlook drove
prices down until October when the low gold price and renewed anxiety about
the economy served to reverse price trends. The Treasury gold stock was
down at yearend owing to its use in Bicentennial medals, which were made
by the Bureau of the Mint and sold by the American Revolution Bicentennial
Administration (West and Butterman, 1978, p. 591).
The world economy was stagnant
in 1977. Limited success in controlling inflation led to higher gold prices,
which benefitted the IMF auctions that continued throughout the year. There
was a hiatus in Treasury sales (Butterman, 1980, p. 428).
IMF auctions continued during
1978, and the Treasury resumed gold stock selling (Butterman, 1980, p.
428). Middle-East oil-producing countries and investors began purchasing
gold with their eroding dollar assets.
Economic conditions worsened
during the next 3 years. Negative political events in Iran, Afghanistan,
and elsewhere propelled the price of gold to an historic high of $850 per
ounce by January 21, 1980. The IMF completed its 5-year auction program
in May 1980. The Treasury sold no more gold in 1980 or 1981 (Lucas, 1981,
p. 347). After the U.S. hostages were released by Iran on January 20, 1981,
political tension was lessened, which led to less hoarding and reduced
gold prices. The Japanese began to invest in the gold market.
Although the United States'
strict monetary policy contributed to a recession and high interest rates
in 1982, the advent of computer trading contributed to short-term volatility
in the gold price (Lucas, 1983, p. 370). Lingering effects of the world
economic recession on the mineral industry led to profit taking during
the first part of 1983. Speculative gold trading to midyear strengthened
price but was followed by profit taking (Lucas, 1984, p. 385). Oil prices
weakened, while gold supplies from mines and official sources increased.
In 1984, the price declined,
owing to increasing strength of the U.S. dollar and investor selling. Weakened
price and a favorable market outlook contributed to increases in demand
for gold-bearing fabricated products (Lucas, 1985, p. 423). The U.S. dollar
weakened in the first quarter of 1985 against major European currencies
and the Japanese yen. It continued weakening in 1986, which encouraged
gold investment (Lucas, 1988, p. 441) as oil prices declined sharply.
By 1987, there was a sharp
reversal in world stock markets with a continued weakness of the U.S. dollar
combined with growing concern regarding U.S. budget and trade deficits
and increasing U.S. private and Third World debt. Stability of the international
monetary arrangements was questioned. Volatile investment markets generated
increased gold-trading activity (Lucas, 1988, p. 441). During 1988, gold
prices declined in response to a variety of factors, such as the withdrawal
of the U.S.S.R. from Afghanistan, which gave investors the perception that
political stability was at hand; weakening oil prices combined with an
increase in interest rates by the U.S. Federal Reserve led to reduced inflationary
expectations, increasing U.S. dollar strength, as well as improved U.S.
trade results (Lucas, 1989, p. 64-65).
Official sector gold sales
increased in 1989 as central banks adopted a more aggressive policy of
gold management (Lucas, 1991, p. 468). In addition, a change of attitude
developed toward gold, aided by concerns about the security of bonds and
other financial assets and a setback in the U.S. stock markets in mid-October
(Gold Fields Mineral Services Limited, 1990, p. 8).
The rise in Japanese interest
rates in 1990 provided alternate investment havens. The U.S.S.R. was reported
to have sold significant amounts of gold for hard currency. The Chinese
sold out of equity swap agreements that were negotiated in mid-1989. The
gold price drifted down as a result of the Persian Gulf War and the recession
(Gold Fields Mineral Services Limited, 1991, p. 8-9).
The brief multination conflict
that started in 1991 in the Persian Gulf did little to affect the perception
of moderating political stability generally or to influence the price of
gold for any sustained period of time. The collapse and restructuring of
the U.S.S.R., however, did much to reduce investor interest in gold (Gold
Fields Mineral Services Limited, 1992, p. 5).
The end of the 1992 bear
market encouraged a return of European and U.S. investor confidence. In
1993, the high gold price, which particularly affected the local currencies
of52 the Middle East and Asia, resulted in reduced hoarding of coins and
large amounts of gold scrap being off-loaded into the market (Roskill Information
Services Ltd., 1995, p. i).
During 1994, the gold market
held onto the gains achieved during the previous year, but the U.S. dollar
price lacked direction and volatility. Hoarding of gold continued to be
reduced, as investors deserted the market (Roskill Information Services
Ltd., 1995, p. i).
The average dollar price
of gold remained almost unchanged between 1994 and 1996. Late in the fourth
quarter of 1996, the Dutch Government provided a key catalyst by selling
one-third of its reserves (Gold Fields Mineral Services Limited, 1997,
p. 5). Fears that other central banks might sell their gold reserves followed
(CRU International Ltd., 1996, p. 19).
During 1997 and 1998, central
banks of several countries sold large shares of gold holdings to meet common-currency
criteria for the European Union or to demonetize. Bank failures or insolvencies
in East and Southeast Asian countries created uncertainty in investment
circles. The price of gold returned to the low levels of 1979 (Gold Fields
Mineral Services Limited, 1998, p. 5).
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1988, Gold: U.S. Bureau of Mines Mineral Commodity Summaries 1987, p. 62-63.
1989, Gold: U.S. Bureau of Mines Mineral Commodity Summaries 1989, p. 64-65.
1991, Gold, in Minerals Yearbook 1989, v. I: U.S. Bureau of Mines, p. 455-482.
1993, Gold, in Minerals Yearbook 1990, v. I: U.S. Bureau of Mines, p. 495-522.
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1974, Gold, in Minerals Yearbook 1972, v. I: U.S. Bureau of Mines, p. 567-588.
1975, Gold, in Minerals Yearbook 1973, v. I: U.S. Bureau of Mines, p. 557-581.
1976, Gold, in Minerals Yearbook 1974, v. I: U.S. Bureau of Mines, p. 603-626.
1977, Gold, in Minerals Yearbook 1975, v. I: U.S. Bureau of Mines, p. 669-696.
West, J.M., and Butterman, W.C., 1978, Gold, in Minerals Yearbook 1976, v. I: U.S. Bureau of Mines, p. 591-615.