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The Price of Gold – Part 3

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The 2000s were one of the most wild times in history for the economy. Even the very first day of the decade was important. At the turn of the millenium, everyone was waiting to see if the Year 2000 computer bug would be as damaging as some people predicted. Computers at the time had only been using the last 2 digits of the year when storing the date. People were worried computers would malfunction in unpredictable ways if some programs read the year incorrectly. Thankfully the planes did not drop from the sky, and the world moved on into a new millenia.

2000s:

2000:$264-325  2001:$256291*  2002:$277-342  2003:$319-417  2004:$375-454

2005:$411-536  2006:$524-725  2007:$608-841  2008:$712-1011 2009:$8101212**

 

Though Y2K was a dud, technology would soon show its wrath. In 2001, the tech bubble burst. In the late 1990s people had began investing in the fledgling internet industry. The problem with that is that many of the businesses that were invested in had bad business models and no clear path to profit. The end result was one of the biggest speculative bubbles in history. The price of tech stocks plummeted, though nearly half of the companies would make it through the crash at lower valuations.

Of course there was also the 9/11 attacks in 2001. These were wholly awful in many ways, with the less obvious consequences of hurting the economy and the insurance industry in particular.

All these factors contributed to a rocky start to the economy in the 2000s, with a recession for 2000-01. At the same time the high point for the price of gold in 2001 fell to a low that had not been seen since the 1970s.

After this, the tables turned. The price of gold started to boom in 2002, and kept going up for many years. By 2005, the price had risen to a level that would fit in with the 1980s. The next year it jumped just above the prices seen anywhere but 1980. This trend continues with 2007 reaching around the same price range as 1980. 2008 and 2009 it broke past that to never before seen highs. It passed $1,000 for the first time ever on Feb 20, 2009.

The rise of gold during this time has many causes. The US had a globally weak dollar  at this time, causing investors and funds to move away from it and seek shelter from risk by holding gold. This effect was compounded by strong oil prices and tensions regarding Iran’s aspirations of nuclear armament.

Late in the decade there is also a glaring factor: the 2008 subprime mortgage crisis. This is one of the biggest crisis ever seen in the US economy. The equity and real estate markets were not able to recover for quite awhile. This caused investment dollars to flee into gold and other commodities that suddenly looked much safer.

Another important aspect to the subprime crisis that is less well known to people outside of finance is the quantitative easing (QE) program introduced by the US government. Sometimes called large-scale asset purchases, QE is the act of a central bank buying up assets (such as bonds) from commercial banks and other financial organizations. A central bank undertaking QE will usually offer rates that incentivize the commercial banks with favorable rates. This floods the banks/institutions with money to invest in the economy to stimulate it and provide liquidity and loans. Quantitative easing began in December 2008 and ran into March 2010. It is commonly referred to as QE1 now, though it was not called that at the time.

One factor that was absent from affecting the price of gold at this time was inflation. In the 2000s, the top three inflationary years were 3.4% in 2000 and 2005 and 4.1% in 2007. The average rate of inflation since 1929 has been just over 3%, meaning the highs for inflation in the 2000s was reasonable. The Fed itself promotes 2% as a healthy target for inflation. These statistics makes it clear that investment in gold was not driven by inflation.

All in all, the rise of gold during this decade can be tied to many root causes. Together, they sent the price of gold soaring.

 

Was gold in an asset bubble though? Come check out the next article to find out what has happened to the price of gold in our current decade!

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