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The History of Gold Prices

Throughout time, gold has been used for a variety purposes but predominantly as a decorative metal, currency, or an investment asset. It is as the latter two that we usually understand gold to have a monetary value, but perhaps we should consider further ways of establishing the price of gold through history.

The oldest examples of gold use are not currency or coins, but rather as items of decorative importance. Even as far back as the Mesopotamians (modern day Iraq and Iran) and ancient Egyptians, the metal was revered for its rarity and beauty, and used in the manufacture of personal jewellery, bracelets, and headwear, that set a[part the haves from the have-nots. Indeed, its perception as something magical, perhaps even spiritual, is evidenced by its use in the pyramids and as an item that would aid the passage to the afterlife.

The Egyptians did produce some gold coins – particularly in the period of 2700 BC to 2300 BC – but it wasn’t until around 550 BC that King Croesus of Lydia (now Turkey) minted the first known gold coins in numbers. These coins became the first global standard currency, being accepted in exchange for goods and services.

However, the use of gold in a monetary sense remained patchy until the early 19th century. With Britain extending its Empire, it adopted a gold standard to make payment for goods from its dominions more easily calculated and conducted. The success of this led to other countries basing their currencies on gold, but the most important basis was set in 1900 when the United States legislated through Congress for the Dollar to be formally pegged to the value of gold. By the outbreak of World War I, most other leading industrial nations had followed suit.

What this meant was that paper money, from any participating country, could be exchanged for a set amount of gold at any time with the central bank that issued the money. This wasn’t just a convenience: it was predicated by economic theory. Currencies were effectively fixed against each other and pegged ultimately against the US Dollar. If trade balances became skewed between nations, the deficit nation was forced to sell enough of its gold to cover the deficit. This would take money out of its economy and force prices down, while the extra gold into the surplus country would expand money supply and push prices up. This would lead to a rebalancing of trade between the two countries.

Around 1900, the official gold price was $20.67 per ounce. With UK Sterling pegged against this value, the pound was valued at around $4.90. However, economic policy decisions began to involve interest rates more freely. Rather than buy and sell gold to rebalance supply and demand, interest rates would be adjusted accordingly. For example, the UK might raise interest rates, making Sterling more attractive and sucking in capital, whilst at the same time having a deflationary effect.

This situation remained in force for many years, but was largely suspended through the First World War, meaning that the US Dollar floated in value against other currencies whilst remaining pegged to gold. It was the post war period that really set the US Dollar as the strong currency it is seen as today. While other currencies moved sharply as economies recovered, many devaluing sharply against the Dollar, the United States stuck with its gold standard.

Graph Showing the 10 Year Gold Price

The UK signed up to the gold standard ion the mid 1920’s, and then abandoned it in 1931 as the world economy reversed into depression. In 1933, President Roosevelt banned US citizens buying, selling, or owning gold, as a precursor to devaluing the dollar on the gold standard in 1934. Gold moved from $20.67, where it had been priced for nearly 50 years, to $35 per ounce overnight.

In 1971, with America’s economic standing in the world weakening, President Nixon abandoned the gold standard completely. This allowed the dollar to float freely against other currencies, and meant that legislators in the United States could use policy more freely to more readily steer its economy. The dollar devalued, and the American economy grew rapidly again (a contributory factor in the oil price crisis of 1973/ 4).

With the peg against the dollar gone, gold rose rapidly against the dollar. In 1971, gold had been priced at $35 per ounce. By 1973, its value had risen to nearly $200 per ounce. Its peak, however, came in 1980 when it hit a record $850, buying encouraged by the Soviet invasion of Afghanistan, revolution in Iran, and a Cold War that was threatening to fall to freezing point.

However, the price of gold fell away from this time as the world became a more stable place and the Cold War ended with the bringing down of the Berlin Wall in 1990. By 2002, gold had fallen to below $300 per ounce.

Since this time, however, gold has been in almost constant demand with buying encouraged by one global financial crisis after another. While major equity markets have virtually remained unchanged through this time gold has risen six-fold, hitting a new all-time nominal peak of $1920 in September 2011.

Throughout history, gold has had value. It was valued so highly in ancient times that it was used to help transport the spirits of dead Pharaohs into the afterlife. The Mesopotamians first realised its value as a method of exchange for goods and services on a large and standard basis. Britain used gold to ease its international trade and help the growth of its Empire. The United States stayed true to the gold standard and manipulated it to become the economic powerhouse of the world. And now? China is now the world’s largest buyer of gold, and is rapidly increasing in economic importance; some would say it is already the world’s most important economy.

History shows us that there is real value in gold, and economies benefit from using gold, and the gold price, to their advantage.

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