The history of gold, from 5,000 years ago until today, in 9 acts.
1. Ancient History and Classical Era
5,000 years ago in Egypt and the Middle East: gold and other metals fulfilled the classical function of money (exchange, means of payment, and value storage). However gold coins were not yet widely used in economic transactions.
In 560 BC, Lydian king Croesus: He was the first to produce standardized gold coins which were of the same size and value. The minted coins guaranteed, besides its propaganda function, the value and quality of the precious metal.
In 225 BC, the Roman Empire used the first gold coins: This was a response to the devaluation of their silver currency, caused by the oversupply of silver coming from the new Roman colonies. Roman gold coins (Solidus) remained the dominant currency of Europe, northern Africa and Asia Minor until the beginning of the 12th century.
2. Medieval Times
In the Middle Ages, silver as preferred coin metal: Gold was more and more used only as a value storage instead of a means of payment, as this metal was rarer and more valuable than silver. The crusades and the expanding long-distance trade helped to reintroduce gold as a means of payment. In Mediaeval Europe gold had a value of 10 to 12 times that of silver.
In 1300 hallmarking: A system to check and guarantee the quality of gold was established in London, creating a common standard for gold purity.
In the 14th and 15th century increase of gold value: The reasons were the decline of European mining, leading to a reduction in new gold supplies. During the same time, coin production decreased by 80%. This made gold in circulation rarer, increased the price for this precious metal, and lead to a continuous deflation.
3. Early Modern Times
Discovery, subjugation and plundering of America: The engagements in the New World brought large amounts of gold to Europe during the 16th century. The new gold supply first reversed deflation and later caused inflation in Spain, later in the rest of Europe, and even in Asia.
Second half of the 16th century, gold coins further lost their value: This is because gold coins were combined with other metals, such as copper, and lost its purity. More low-grade coins were brought into circulation due to the Seven Years War (1756–1763).
Fixed gold-silver conversion rate and gold standard: In the United Kingdom, Sir Isaac Newton, warden of the Royal Mint, determined the conversion rate of gold and silver. This helped to ease the big fluctuations of gold coins. In 1774 the British Parliament introduced the gold standard. Here, the strengths of the currency is determined by the national gold reserves.
Bimetallism of the 18th and early 19th century: Other European countries and the United States minted at the same time gold and silver coins. The basis was a fixed conversion rate between these two metals. In France, starting in 1795, the rate was 15:1, meaning that gold has a 15 times higher value than silver.
4. Classic Gold Standard (1816 – 1914)
British Pound becomes reserve currency: On 22nd June 1816, Great Britain declared the gold currency as official national currency (Lord Liverpool’s Act). On 1st May 1821 the convertibility of Pound Sterling into gold was legally guaranteed. Other countries pegged their currencies to the British Pound, which made it a reserve currency. This happened while the British more and more dominated international finance and trade relations. At the end of the 19th century, the Pound was used for two thirds of world trade and most foreign exchange reserves were held in this currency.
American Civil War and Gold Speculation: Between 1810 and 1833 the United States pursuit de facto the silver standard. The gold price was at US$ 19,39 for one ounce of fine gold. In 1834 (Coinage Act of 1834), the government set the exchange gold-silver exchange rate to 16:1 which implemented a de facto gold standard. The American Civil War (1861 – 1865) and the Black Friday at the New York Stock Exchange (24. September 1869) lead to spikes in gold price of US$ 591.12 and US$ 33,49, resp. per ounce. In 1879 the United States set the gold price to US$ 20,67 and returned to the gold standard. With the “Gold Standard Act” of 1900, gold became an official means of payment.
5. Interwar Period (1918 – 1939)
Return to the Gold Standard: During wartime, central banks abolished the gold standard to be able to print more paper money which should help to finance the war. At the 1922 conference of Genoa central banks proposed to return to a partial gold standard to foster international trade and economic stability. This was only a partial gold standard, as gold stayed in the central banks’ vaults. The gold was represented by paper notes.
The uncoordinated return to the gold standard resulted in over- and undervaluation of important currencies and lead to the collapse of the new gold standard as a regulation of the international monetary system. Its collapse was prompted by the Bank of England’s decision in 1933 to suspend redeeming gold. This meant, that citizens were not to receive anymore gold in exchange for banknotes.
Prohibition of Gold in the United States: In 1933 Franklin D. Roosevelt prohibited the possession of gold by private citizens. Gold coins, bars and certificates had to be exchanged for a fixed price of US$ 20.67 per ounce. The only exception was gold for industrial or artistic purposes. The rationale was to prevent the circulation of privately owned gold which may have become a competing currency. A violation of this prohibition could result into a fine of US$ 100 (or US$ 1,708 at today’s value) or 10 years of prison. However, the biggest part of the population was not affected by this prohibition, as citizens still could keep up to five ounces of gold. Roosevelt’s prohibition was only abolished 40 years later. On 31st January 1934 the Exchange Stabilization Fund was established and the gold price was set to US$ 35.00 per ounce.
6. Bretton Woods System (1944 – 1971)
Introduction of the Bretton Woods System: This monetary order established the rules for global commercial and financial relations, being named after the conference of Bretton Woods, which took place in 1944 in a New Hampshire hotel of the same name. Bretton Woods promoted the US dollar to the reserve currency with a fixed exchange rate of US$ 35 for one ounce of gold. The currencies of participating countries were tied to the US dollar.
Aim: As foreign currencies were pegged to the dollar, the gold rate could be set for a long time in advance. The Bretton Woods System also bound the United States to redeem the participating countries’ foreign dollar reserves for gold. The aim of Bretton Woods was a barrier-free word trade based on fixed exchange rates. Two new institutions were to oversee the system. These were the International Monetary Fund and the International Bank for Reconstruction.
Triffin Dilemma: In 1959, the Belgic-American economist Robert Triffin pointed out a flaw in the Bretton Woods System. Foreign governments held more dollar reserves as the US central bank had gold reserves. Thus, to maintain the liquidity for international trade, more US dollars had to be printed. This however would result in a deficit of the United States’ balance of payments. Therefore, Triffin suggested creating an artificial currency. This was eventually considered with the special drawing rights.
London Gold Pool: In 1960 US foreign liabilities exceeded their national gold reserves. This proved a danger to Bretton Woods. To sustain the system, the USA and seven European nations agreed to employ market interventions to keep the gold rate at a certain rate.
Crisis: In 1967 the French president Charles de Gaulle declared that the Vietnam War made it impossible for France to continue with the payments for the London Gold Pool. In the same year, the British government decided to devalue the British Pound. This resulted in a rush demand for gold.
Collapse: In 1969 several participants of Bretton Woods tried to redeem their dollar reserves for gold. However, the United States was not able to fulfill their contractual obligations. (Foreign US dollar reserves were at that time so large that the United States could not even have redeemed the dollar reserves of merely one participating country). In 1971 Nixon cancelled unilaterally the direct convertibility of the dollar to gold (Nixon shock). This led to a collapse of Bretton Woods and the fixed gold price of US$ 35 per ounce ceased to exist.
7. Bull Market: Upward Trend (1971 – 1980)
Abolishment of Bretton Woods: On 1st May 1972 the gold price jumped to over US$ 50 per ounce (US$265 inflation adjusted) for the first time after the 1864’s Black Friday. In the first quarter of 1973 the currency markets had to be closed for fourteen days, after which the Bretton Woods System was succeeded by a system of flexible conversion rates, without any peg to gold and dollar.
The begin of gold trade: On 14th May 1973, the gold price broke through the threshold of US$ 100 per ounce (US$ 509 inflation-adjusted). On 14th November 1973, US President Gerald Ford legalized the possession of gold by private citizens. In the next years many other countries, such as Japan, allowed its citizens to own and trade gold. In 1975 the New York Commodities Exchange was established and trading in gold futures could begin.
Jamaica Agreement: In 1976, the International Monetary Fund agreed upon the future of the gold standard and the international currency system. With the Jamaica agreement the IMF eliminated the pegging of gold to the US dollar and accepted managed floating exchange rates. Since then, currencies are fiat money, not redeemable by gold and theoretically the money supply is infinitely expandable.
In the 1970s industrial countries experienced stagflation with strong inflation, weak economic development, low productivity and high unemployment. This decade was characterized by high uncertainty in the financial world, the oil crisis, a strong increase of US national debt, a strong increase of money supply and a flight of investors into material assets. During this time, the gold price increased 15-fold.
On 27th December 1979 the gold price reached a new high of over US$ 500 per ounce (US$ 1,552 considering inflation). On 21st January 1980 the gold rate at the New York Commodities Exchange stood at US$ 873 (US$ 2,346 inflation adjusted). The reasons were the Iran crisis and the attempted occupation of Afghanistan by the Soviet Union. This all-time high marked the end of an upward-trend and set a record for gold for 28 years.
8. Bear Market: Downward Trend (1980 – 2001)
In 1980, a 20 year-long gold bear market began. To end the economic stagnation, the US Treasury, among other things, limited the increase of money supply. In the short-term this resulted in a more severe recession and a higher unemployment rate. However, this policy gradually stabilized the economy and controlled inflation. In the 1990s, the United States experienced under Bill Clinton an extended economic upturn (New Economy). In 1994, the New York Commodities Exchange merged with the New York Mercantile Exchange (NYMEX). In 1999 the gold rate in London was at an all-time low of US$ 252,80 (US$ 336 inflation-adjusted).
After 1982 China allowed the possession of gold by its citizens. Further, the establishment of the Shanghai Gold Exchange in 2002 expanded considerably the gold trade und thus increased demand for this precious metal. Before that time, gold had to be sold to the Chinese Treasury. Within the next five years, China overtook the United States to become after India the second biggest gold buyer.
To regulate gold sales, and thus control the gold price, 15 European nations signed the Central Bank Gold Agreement, defining how much gold could be sold annually. The limitations were 400 per year or 2000 tons within five years (CBGA1 1999 – 2004). The second agreement, CBGA II (2004 – 2009), restricted gold sales to 500 tons annually. The third agreement, covering the years 2009 until 2014, set gold sales to a yearly 400 tons.
9. Bull Market: Upward Trend (2001 – )
Since 2001 the gold price has risen steadily. This increase has a clear correlation with the growth of US national debt and the weakening of the US dollar relative to other currencies. In 2005 the gold price reached US$ 500 for the first time since 1987.
Three years later, in 2008, the rate was at more than US$ 1,000. The financial crisis increased the demand for physical gold and exchange traded funds (ETF). The gold reserves of the biggest gold ETF, SPDR Gold Trust, reached 2010 a record of 1320 tons. Therefore, this gold fund controlled more gold than the Chinese National Bank.
In the same year, several central banks planned to ramp up their gold reserves, among others the Chinese National Bank, the Reserve Bank of India and the Central Bank of Russia.
December 2010, the gold price reached a new record of US$ 1431,60 per troy ounce. Compared to gold, the US$ experienced an all-time low. Reasons were uncertainties about a sustainable economic recovery, increasing inflation, possible corporate insolvencies and defaults of corporate bonds. Other drivers of demand for gold were growing national debt, low interest rates and an expansion of money supply. The decrease of gold production by 10 percent since 2001 and strong demand for jewelry and by institutional investors were to other factors that have been driving up the value of gold.
August 2011, more than US$ 1900 for one ounce of gold. Investors are seeing in gold again a save heaven thanks to the US national debt, financial crisis in Europe and the fear of a new recession.
What will be next?