In the last article we explained the role of the gold standard in the middle of the 1900s, up to its demise in the early 1970s. In this article we will cover the price of gold since that time, and highlight the important moments which caused the price changes.
The obvious place to begin is 1971, when America began to remove the gold standard. First take a look at this graph of the highs (the blue line) and lows (the red line) of price over the years since the abolishment of gold standard.
Below we will break down the price movements by decade and some of the notable events involved. In the header for each decade we show the figures by year, with the maximum and minimums for the high and low categories for that decade shown with two stars and one star, respectively. These figures vary somewhat depending on the source of data since there is no universal exchange.
As stated, the gold standard began to be dismantled in the early 1970s. The convertibility of the dollar to gold was ended in August 1971. Near the end of that year, the Smithsonian agreement moved the price of gold to $38 USD per ounce. The value of gold was changed to $42.22 in 1973 (though with convertibility gone this was just a benchmark rate).
It should come as no surprise that after convertibility ended, the price of gold increased. America already knew this was the way the price of gold needed to go. As you can see in the chart, the price had increased immediately prior to the end of the gold standard. Once gold was open to the pricing of the market, prices shot up. President Ford also changed the rules to allow private ownership of gold. Many heard this announcement as the shot of a starting pistol, and gold took off.
Take a look at the price just after the end of convertibility, in 1973-74. The price jumped to around 4 times higher, which was likely partly due to a bubble forming out of this newly exciting asset. The price seen in 1974 set a high point for most of the 1970s. Inflation was also higher than normal in this decade, which we will expand upon soon.
The price was seen breaking higher limits late in the 1970s. Starting in 1978, gold prices started a meteoric breakout. The low point in 1978 was roughly equal to the high point in 1977. This same pattern was seen the year after in 1979 as well, with the high price in 1979 reaching $524, roughly doubling the previous year’s high.
To say this was substantial would be an understatement. This was a new turn in history, and a big moment for the price of gold. There are a few reasons that explain this breakout. A large part of the explanation comes from the economic aims America pursued after World War II. The Employment Act of 1946 legislated the bulk of these aims. The website Federal Reserve History explains that this act made it the federal government’s responsibility: “to promote maximum employment, production, and purchasing power”.
These policy aims ended up causing high inflation as a byproduct. The dollar was pushed further towards inflation because of the Vietnam War and rising oil prices, as well.
In other words, money was losing value year over year, and this was at a rate that was historically quite high. Inflation rates reached 9% in 1978 and 13% for 1979. For context, there have been ten times after the Great Depression that year-over-year inflation was above 8%. Four of those instances are in the 1970s, with two others being 1980-81.
This is relevant because gold is a famous store of value. It is a real commodity that is easy to store, and will not lose its value easily.
That aspect of gold in and of itself makes it a better hedge of inflation. As people buy gold as a safe haven during inflationary periods, that drives up the value of gold. This therefore promotes gold as an investment as well. The cascade may even happen to the point of becoming a bubble, driven by these twin factors of inflation hedge and resultant speculation.