Why Gold? Why now?

Finance

Gold is more than just a shiny rock you dig out of the ground so it can be fashioned into coins or jewellery. A lot of people don’t know much about gold. The economics establishment has closed ranks around discussions about gold. We teach our children about money whilst they are still young but that’s just about it. You can teach mining and engineering students about gold but for some reason business colleges do not include it in their courses. Talk about gold in a monetary context and you are labelled a “gold bug” – a term which is derogatory.  

People have long winded discussions about stock and bonds and the falling or rising currency but introduce gold bullion in the conversation, you’ll have a lot of eyes looking at you with confusion. It’s hard to believe that not so long ago, gold was currency, that the U.S dollar wasn’t the world’s reserve currency until the end of the gold standard on the 15 August 1971.

When the U.S President Nixon suspended the practice of redeeming dollar for gold, it was not supposed to be a permanent thing, rather a “time-out” to allow for the devaluation of gold. A meeting was held with other world leaders in December 1971. The leaders signed what is now known the Smithsonian Agreement. Gold was then valued at $35 an ounce, then $38/oz and then $42/oz.

Ownership of gold bullion by private citizens was banned. But the world never returned to the gold standard as Nixon had planned. And the International Monetary Fund (IMF) officially declared that gold was not a currency even though the it carried thousands of gold on its books in the 1970s, whilst still holding 2,814 tons of gold placing it 3rd most significant holding in the world after the U. S. and Germany. So, by 1974, gold was no longer regarded as a monetary asset and that’s probably why it was excluded from economics subjects or discussed in a normal way like people discuss the dollar or oil, stocks and bonds and other commodities.

It was a chaotic time. Germany and Japan were swayed by Milton Friedman to suspend exchange rates moved to suspended exchange rates beneath the misguided influence of Milton Friedman. France firmly insisted on a return to a stable and real gold standard. Yet, the return to a true gold standard never happened. 

No wonder most people today don’t understand gold.

Gold may have been banned, left out of the education system and relegated to history books but somehow it continued to be significant to some in the real world. In 1974, President Ford signed a law that reversed President Franklin Roosevelt’s Executive Order 6102 which outlawed gold. 

After 4 decades it was once again legal for Americans to own gold coins and bars. The official gold standard was dead, but a new “private gold standard” had just begun.

That’s when things got interesting.

The free trade of gold traded freely, heralded the start of the bull market. In 1971-1980 the precious metal went up 2,200%, the second bull market happened in 1999-2011 when the precious metal gain 760%. There were two bear markets between the bull runs. One was in 1981 to 1998 and the other happened between 2011 and 2015.

Gold’s trading just over $1,700/oz. What could drive gold higher to more than $2,000/oz. per ounce an higher? 

1#. Investors losing confidence because of the massive amount of dollars flooding the market.

#2. The secondary driver is a continuation of the bull market. With previous bull markets as points of reference the bull run from now to 2025 could take the price higher. Some have predicted a value of $14,000 which might sound impossible hut totally plausible.

#3. Panic buying if there is a second wave could increase the gold price. This and a failure of by dealers to honour physical gold or the outcome of the upcoming presidential elections in the US could tip the scales. 

It won’t even take all three things to happen at once for the gold price to go higher. Any one of these could be trigger. These and other events could be the catalyst which is why having gold is important in your portfolio is better.

 

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