The impact of COVID-19 closings on the gold supply chain

Some people see gold as a relic, a thing of kings, pirates, and myths. It produces no income, sits on vaults, and adorns the necks and wrists of the wealthy.

But this is also just a myth.

In fact, as a financial asset, the value of gold has shined over time with periods of exceptional performance, one of which may be happening now.

Today’s infographic comes to us from the Sprott Physical Gold Trust and describes the history of the gold price from 1915 to 2020 and three bull markets or “gold bulls” from 1969, using monthly data from the London Bullion Market Association.

But first a little history …

The gold standard

* All figures are in USD

During the early days of the American Republic, the US used the British gold standard to set the price of its currency. In 1791, he established the price of gold at $ 19.75 per ounce but it also allowed redemption in silver. In 1834, he raised the price of gold to $ 20.67 per ounce. The price of gold would retain a nominal value through depressions, civil wars, and wars.

However, $ 20 today is not the same as $ 20 in the past. The US dollar may have been convertible at a fixed price, but the amount of goods you could buy varies from year to year depending on inflation. So, for example, from 1934 to 1938, an ounce of gold would cost $ 34, but $ 34 today would buy a small fraction of an ounce of gold.

While the price of gold may seem cheap in the past, adjusted for inflation, it is not as low as it seems. Governments would price their currency against an asset to ensure price stability, however if there were too many claims against the underlying asset that asset would be depleted and the currency would no longer have value.

This threat would compel governments to change standards, as the currency became more common and gold reserves scarcer.

An era of government intervention

In the wake of the 1929 stock market crash, investors began swapping US dollars for their gold equivalent value, removing the currency from the economy. To stop the flow of funds to gold and the depletion of government gold reserves, in 1933 President Franklin D. Roosevelt limited private ownership of gold to discourage hoarding and encourage investment. In 1934, Congress passed the Gold Reserve Act that prohibited private ownership of gold and nominally increased the price of gold to $ 35 per ounce.

In 1944, the victorious allied powers negotiated the Bretton Woods Agreement, making the US dollar the official world reserve currency. The United States ensured that an ounce of gold was worth $ 35 in its currency⁠, at least until the start of a stagnant economy in the early 1970s led to the official end of any real gold standard.

Golden Bull # 1: December 1969 – January 1980

In 1969, the gold standard of the United States had increased to $ 42 per ounce in nominal terms, however, a period of economic volatility would challenge and change the monetary policy of the United States.

On August 15, 1971, President Richard Nixon ordered the Federal Reserve to stop honoring the value of the US dollar in gold at a fixed value, abandoning the gold standard. In 1974, President Gerald Ford would once again allow private ownership of gold bars. Energy crises, rising inflation and high unemployment stalled the economy.

In January 1980, the price of gold reached $ 2,234 per ounce in today’s dollars amid a double-digit inflation environment. Federal Reserve President Paul Volcker battled this inflation with double-digit interest rates that in turn slowed the economy, causing a recession.

The interest rate-induced recession would herald a new global economic boom that defined the 1980s and 1990s. The price of gold fell to $ 753.96 per ounce in June 1985, as the economy improved.

From December 1969 to January 1980, gold rose from $ 285 to $ 2,234 per ounce, an increase of 684% in 122 months, in inflation-adjusted terms.

Golden Bull # 2: August 1999 – August 2011

Expanding household incomes and declining interest rates under Federal Reserve Chairman Greenspan pushed gold to a low of $ 377.44 per ounce in late April 2001.

Lax monetary policy and a reduced capital gains tax fueled speculative investments in the new Internet economy through a growing retail brokerage market and the emergence of venture capital. The technology bubble would eventually burst as these companies were unable to build sustainable businesses and investor money ran out.

During the year 2000, investors rushed out of their speculative investments in technology, resulting in several market hangs. Then in September 2001, it happened on September 11, ushering in a new era. Gold steadily increased during this period.

In 2008, the global financial crisis shook the financial markets and left a recession. Policy makers and central bankers embarked on a controversial quantitative easing policy to support financial markets. The price of an ounce of gold hit new highs in late August 2011, as concerns grew about debt levels in the United States and other countries.

From August 1999 to August 2011, gold rose from $ 394 to $ 2,066 per ounce, an increase of 425% in 145 months, in terms adjusted for inflation.

Golden Bull # 3: November 2015 – May 2020

In the wake of the GFC, the Federal Reserve fueled an economic recovery with cheap money, noting that gold remains at a low of $ 1,050 per ounce for December 2015. It was not until the election of a peculiar American President in 2016 that gold would rise again.

Pressure to raise interest rates, an aging debt-led economic recovery, a trade war with China, and the recent COVID-19 crisis have once again caused economic uncertainty and renewed interest in gold. With interest rates already at record lows and quantitative easing as the standard operating procedure, global economies are entering unprecedented territory.

There is still little information on the direction of the economy, but from November 2015 to May 2020, the price of gold has increased since $ 1,146 to $ 1,726 per ounce, 55% in 55 months.

Gold going forward

In an era of tech startups, ETFs, and algorithmic trading, gold is seen by many as a brilliant paperweight; however, its performance over time against other assets shows that it is far from this.

In 1915, it was worth an ounce of gold $ 488.66 per ounce in dollars today and as of May 15, 2020, $ 1,751 per ounce. Gold has proven its worth over time as companies, countries, and governments come and go.

The “golden bulls” are not periods for idle idol worship. Gold will always be gold, in fact and myth.