Why Precious Metals
There are a number of reasons why you should hold physical gold and silver. Precious metals have outperformed most asset classes over the last 50 years setting new highs every few years and is now being traded at over $2,000 an ounce! We are at a turn point in history where talks of war and geopolitical issues across the globe, are fueling a drastic change in international monetary policy. Gold and Silver are the best way to protect and conserve your wealth. Contact us so we can share our insight and updated products list and how you can take advantage of our competitive pricing.
The History of Gold in Monetary Policy
The price of gold has increased tremendously since 1933, rising from US$20.67/ounce to more than $1900/ounce in 2011. Let’s take a look at how exactly this happened.
The Great Depression Era
The US dollar was on a gold standard from 1873 to 1933. During this era, the US dollar was consistently priced at $20.67 per ounce of gold.
US President Franklin D. Roosevelt took office in March 1933, inheriting an economy that was in shambles due to the Great Depression. One policy objective of the new administration was an increase in the money supply to encourage prices to rise. However, the US government was limited in its ability to increase the money supply while maintaining a gold standard. To address this, the Roosevelt Administration promptly suspended convertibility of paper dollars into gold and banned exports of gold in an effort to increase gold reserves.
Even more drastically, President Roosevelt issued the infamous Executive Order 6102, which required US citizens to turn in gold coin (to be exchanged for paper dollars at the rate of $20.67/oz). This executive order brought in more than $300 million in gold coin to the national gold reserves.
Nevertheless, this was not enough to substantially increase the money supply. In early 1934, Congress passed the Gold Reserve Act, which (despite its name) drastically weakened the country’s gold standard. First, this law codified the executive order of the previous year, and criminalized holding more than $100 in gold coin (many prosecutions did occur in subsequent years). Even more drastically, the price of gold was increased by decree on January 31, 1934, from $20.67/oz to $35.00/oz – an increase of nearly 70%.
World War II and the Bretton Woods Agreement
In addition to this higher price of gold, US gold reserve levels also increased due to the outbreak of war in Europe. Many European countries (especially the UK) transferred tremendous quantities of gold to the US as payment for war materiel. By the end of the war, with virtually every other major economy destroyed, the US had the vast majority of the world’s gold supply.
In 1944, even before the war’s end, leading economists met at the Bretton Woods Conference in New Hampshire to discuss the post-war monetary system. With the US holding so much gold, it was agreed that each country would maintain a fixed exchange rate against the US dollar, which was in turn backed by 40% gold reserves and was exchangeable for gold at the price of $35/oz.
Stagflation and the 1980 Peak
Once the dollar was allowed to float in 1973, the price of gold began to rise at a torrid pace. This was accelerated by the outbreak of the Yom Kippur War in October 1973 between Israel and a number of Arab countries. To protest the United States’ support for Israel in the conflict, many oil-producing states reduced oil production output, leading to a huge spike in fuel and other commodity prices.
The US economy of the 1970s is often characterized with the term “stagflation,” meaning an era of high inflation and stagnant economic growth. The price of gold backed down to $110/oz by the time of the United States’ Bicentennial in July 1976, but then resumed its rise, surpassing the previous high of $180/oz by June 1978.
Central Banks Sell Their Gold
The US and most major economies got a handle on double-digit inflation in the early 1980s. A thriving economy, reduced geopolitical concerns with the end of the Cold War, and generally falling commodity prices led to a drop in gold prices in the 1980s and 1990s.
Most developed economies also implemented tighter fiscal policies in the 1990s. The US ran a budget surplus for the first time in decades under the Clinton Administration. European countries also ran tighter budgets as they prepared to transition to the Euro.
A New Bull Market and the Global Financial Crisis
Gold began another bull market after 2001, when central banks lowered interest rates to stimulate the economy. Gold reached the psychologically significant $500/oz level in 2005, and neared $1,000/oz just before the crash in 2008.
Not wanting to repeat the mistakes of the Great Depression, most central banks drastically increased the size of the money supply in the aftermath of the Global Financial Crisis.
What Affects Gold Prices?
As we can see from this amazing volatility over the past few decades, gold prices are affected by a variety of factors.
- Geopolitical Risks: When geopolitical risks increase or some economic threat looms large, gold often has a corresponding price increase.
- Industrial Demand: Gold is also something of an industrial commodity, and demand will often rise or fall along with the rest of the commodities market.
- Interest Rates: One of the most significant factors for gold prices in the modern era is the real or net interest rate. When real interest rates are low or negative, demand for gold spikes.
The simplest way for investors to take advantage of gold’s status as an investment is a purchase of gold bars or rounds. Third World Metals is pleased to offer a variety of high-quality gold products produced to international standards.