The time: early summer of 1972. The place: London. I was a 24 year-old reporter at a small financial magazine. My editor appeared in the doorway of my office and said, “It’s been 12 months since President Nixon closed the gold window. What do you think of that?”
I told him I hadn’t the faintest idea what he was talking about. He responded, “Good, I’m glad you don’t know what it means. I don’t understand it either, I just read it somewhere. But if you and I don’t understand it, that means our
readers probably don’t understand it. You’ve got three weeks before we publish our next issue. Go find out about the gold market and write me an article.”
And here I am. Forty-nine years since that conversation, I’m still writing about gold — now marking the 50th anniversary of President Richard Nixon ending the formal link between gold and currencies, creating a free market in gold. Nixon’s momentous step on August 15, 1971 meant gold, for the first time ever, was free to find its own level, driven by supply and demand fundamentals. So, let’s look at all that has transpired in a half century of this free market.
Prior to Nixon’s action, the Bretton Woods Agreement had established the gold exchange standard, whereby the US linked the US dollar (USD) to gold, and each country agreed to link its own currency to the USD in more-or-less fixed relationships.
Foreign governments had the right to exchange their dollar assets for gold, drawn from America’s official reserves. Because some countries took advantage of this right, the US found its gold reserves were being depleted at an unacceptably high rate, falling from 22,000 metric tons at the start of 1950 to approximately 9,000 metric tons by the end of 1971.1
Also, partly because of the inflationary pressures generated by the Vietnam War, by 1971 the US had reached a point where the amount of dollars in foreign hands far outweighed the country’s gold holdings when measured at the official price, then approximately $42.20 an ounce2. Of course, international governments knew America eventually would have to end the depletion of its gold reserves — and the price of gold would rise.
Turbulence in the 1970s
The decade following the opening of the free gold market was one of economic turbulence — US inflation reached 15% a year and crude oil hit an unprecedented high of $40.00 a barrel3. Also, the Vietnam War, Soviet invasion of Afghanistan and revolution in Iran created political unrest.
It’s hardly surprising that by January 1980, gold had reached an interim peak of $850 an ounce, up twentyfold in less than 10 years4. In fact, gold now enjoys a reputation as a perceived safe-haven asset5 because historically during turbulent times its performance has become less correlated to traditional equities to provide a potential ballast for portfolios that can help limit drawdowns.
Gold became part of US portfolios when in January 1975 the prohibition against US citizens owning gold as an investment that had been in place since 1933 was lifted. And the rise of the South African Krugerrand one-ounce gold coin (Kruger) meant there was a product readily available to satisfy more than 40 years of pent-up demand.
By 1980, the Krugerrand accounted for an estimated 90% of the demand for all gold coins in the world. But the phenomenon came crashing to a halt when President Ronald Reagan imposed sanctions against apartheid South Africa, effectively ending America’s reign as the primary market for the South African coins.
Gold’s Price Decline in the 1980s and 1990s
A decline in the price of gold that began in 1980 continued pretty steadily throughout the 1990s. By 1985, it was widely accepted that Paul Volcker, chairman of the Federal Reserve (Fed) from 1979 to 1987, had “tamed the wild beast of inflation” in the early 1980s. He achieved this by raising short-term interest rates as high as 20%. Inflation dropped dramatically, to a level where many investors no longer felt they needed to protect their portfolios against it. Many of them had done so by investing in gold as a perceived hedge against inflation — and with no inflation, the need to hedge against it disappeared.
Only the Soros/Goldsmith rally interrupted gold’s price decline. With gold at a low of $326 in March 1993, the two financiers separately began taking positions in gold, through shares of gold mining companies and via options on physical bullion. Word of their investment spread rapidly, and investors followed their lead. Gold moved briefly above $400, a level it had not seen for a couple of years, but the rally quickly fizzled out.
Later, low real interest rates and signs of softness in stocks and bonds prompted another move above $400 in 1996. However, the growing net sales of gold out of official reserves by central banks, primarily in Western Europe, brought renewed weakness. Central banks as a community had turned net sellers as early as 1989, but sales accelerated as the next decade unfolded. In fact, the sales continued until 2009.
Key Central Bank and Investment Developments
The Washington Agreement on Gold and the launch of the first gold-backed exchange traded fund (ETF) stand out as important events.
In early 1999, the Bank of England announced plans to sell half of the UK’s gold reserves by auction. When the first auction took place in July, gold promptly fell to a 10-year low of $253. During the annual meeting of the International Monetary Fund (IMF) in September 1999, the finance ministers of 15 European countries signed the first Central Bank Gold Agreement (CBGA) which quickly became known as the Washington Agreement on Gold. Initially understood to be an agreement among major central banks to limit their sales of gold, sales by central banks actually increased during the first five-year CBGA and continued for another decade.
Renegotiated every five years, the Washington Agreement on Gold brought some initial stability, but the gold price fell to $255 by 2001. By the end of the second five-year agreement in 2009, sales were dwindling, then ceased altogether. But then a different dynamic took over: central banks in emerging countries, which on average hold less than 5% of their reserves in gold, stepped up their purchases. This became an important element of the demand side of the gold equation that persists to this day, with emerging market central banks regularly accounting for over 10% of global gold demand.
Central Bank Gold Demand Since the Collapse of the Bretton Woods Agreement
Source: Bloomberg Finance L.P., World Gold Council, State Street Global Advisors. Data from January 1, 1970 to December 31, 2020. Past performance is not a reliable indicator of future performance.
The second big innovation in gold came with the launch of the first gold-backed ETF in 2003 by a partnership that included the World Gold Council in Australia. This was followed by the launch of a British version later the same year. In November 2004, the World Gold Council in partnership with State Street Global Advisors launched the SPDR® Gold Shares on the New York Stock Exchange.
SPDR Gold Shares reached $1bn in assets within the first three trading days6. SPDR Gold Shares have remained the market leader by a wide margin ever since.7 Investors have embraced gold-backed ETFs with considerable enthusiasm. Total assets under management in global gold ETFs stands at 117 million ounces, more than twice the amount of gold sold in the form of Krugerrands.8
All-Time High Fueled by Jewelry Demand, Monetary Policy and a Global Pandemic
At $255 an ounce in April 2001, gold continued to climb to reach $1,920 an ounce by August 2011. The increase was sparked by strong economic growth throughout the emerging world, leading to steady and sustained increases in the demand for gold jewelry. That took the price up to $1,250 by the fall of 2010, an increase of $100 a year on average.
The next three years were extremely speculative, with gold soaring to over $1,900, and then dropping back to $1,250 by the end of June 2013. Gold then essentially traded sideways for the next six years, trapped in a narrow range between about $1,100 at the bottom and $1,350 at the top from June 2013 to June 2019.
So, how did gold break out of its six-year trading range? Although short-term interest rates remained unchanged at the June 2019 Federal Open Market Committee (FOMC) meeting, Fed Chair Jerome Powell said he was concerned that trade wars with China might trigger a recession. As a result, he indicated that he would make what he described as a “mid-cycle adjustment.”
Powell subsequently reduced rates 25bps at the July meeting and continued to adjust rates downward, effectively reducing rates to zero during the advent of the COVID-19 pandemic in early 2020. The COVID-19 pandemic also triggered a perceived safe-haven buying in the US that drove the price of gold to its all-time high of $2,067 in August 2020.
Gold in the Current Market Environment
After opening this year above $1,900, gold has lost some ground due to profit-taking and rising yields at the longer end of the bond market. Gold also dropped more than $100 when the markets interpreted the June 2021 FOMC meeting as indicating a turn toward a significantly more hawkish approach.
In my view, that was a serious overreaction that demonstrates just how nervous markets are right now. In the June 16th meeting, Powell said inflation was running higher than he had expected, and though it might continue to do so for a few more months, inflation would be transitory. And Powell has stuck to that viewpoint in every statement since June. Further, the Fed indicated that instead of waiting until 2024 to raise rates as previously stated, it might be forced to act as soon as 2023. I find it difficult to understand why gold should have fallen $100 on that “news.”
When the many investors and their advisors I speak to every day all over the US and Canada ask me to explain the current weakness in gold, I suggest they focus instead on gold rising 18% in 2019 and a further 24% in 2020. Gold today is more than $400 above the $1,350 where its price was capped from mid-2013 to mid-2019. Gold today is also more than seven times the initial price of $255 we saw at the beginning of the 21st century.9
Finally, investors with a really long perspective might reflect on how much the gold price has increased from $42.20 when Nixon created the free market in gold 50 years ago.
Gold and SPDR Gold Shares have Exhibited Positive Returns Over Time
Source: From 1900–1967, the dollar price of gold is calculated from the average annual exchange rates of the dollar against the British pound taken from a table published for the London and Cambridge Economic Service by Times Newspapers Ltd. as part of The British Economy: Key Statistics. From 1968–March 19, 2015, the gold price is based on the London Gold Fix, a daily survey of spot gold prices conducted by telephone. From March 20, 2015–June 30, 2021, the gold price is based on the LBMA Gold Price, which is determined twice each business day (10:30 a.m. and 3:00 p.m. London time) by participants in a physically settled, electronic and tradable auction. All gold prices from 1968-present based on data compiled by Bloomberg Finance L.P. Performance quoted of SPDR Gold Shares above represents past performance, which is not necessarily indicative of the future performance. Investment return and principal value will fluctuate, so you may have a gain or loss when shares are sold. Current performance may be higher or lower than that quoted. The returns were calculated on an offer to bid/single pricing basis on USD terms (taking into account any subscription and realization fee), with all dividends and distributions reinvested taking into account all charges payable upon reinvestment.quoted. Visit ssga.com/etfs for most recent month-end performance.
There will no doubt be many news stories about the 50th anniversary of the advent of the free market in gold, but I want to close with a reference to a more personal anniversary.
This August I begin my 50th year writing about the gold market. Having worked as a journalist, at a mining company, on Wall Street, for the World Gold Council and now as the Chief Gold Strategist at State Street Global Advisors, my career has been a bit of a roller coaster ride. The one thing I can say with complete conviction is that my life in gold has never been boring.
My experienced summary: Gold’s climb from $42.20 in 1971 to around $1,800 currently has been pretty spectacular. I accept that gold doesn’t bear a coupon like a bond or pay a dividend like a stock. However, over the 50-year period since the closing of the gold window, on a compound annual growth rate basis, gold has increased almost 8% a year.10 That’s not too shabby for an asset that most people say doesn’t have a yield.
1 IMF, Bloomberg Finance L.P, August 16, 2021. 2 Bloomberg Financial L.P. and State Street Global Advisors, date as of August 13, 1971. 3 Bloomberg Financial L.P. and State Street Global Advisors, date as of March 31, 1980. 4 Bloomberg Financial L.P. and State Street Global Advisors, date as of January 31, 1981. 5 Assets may be considered “safe havens” based on investor perception that an asset’s value will hold steady or climb even as the value of other investments drops during times of economic stress. Perceived safe-haven assets are not guaranteed to maintain value at any time. 6 SPDR Gold Shares (GLD) owns 33,151,579 ounces of gold while the second biggest gold-backed ETF owns 16,055,636 ounces of gold, date as of July 31, 2021. 7 Bloomberg Financial L.P. and State Street Global Advisors, date as of November 21, 2004. 8 realkrugerrand.com (official website of Krugerrand) date as of July 31, 2021. 9 Bloomberg Financial L.P. and State Street Global Advisors, August 20, 2021. On August 20, 2021, the price of gold was $1,785.15. Gold has traded between a low of $1723.35 and a high of $1,829.10 for the month of August, and through August 20 has averaged $1,777.62 for the month, according to the LBMA PM price. 10 7.74%. Bloomberg Finance L.P. & State Street Global Advisors, date range from 8/15/1971 to 8/15/2021. Past performance is not a reliable indicator of future performance.
The views expressed in this material are the views of George Milling-Stanley and Gold Strategy Team as of August 20, 2021 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
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