1971: US president Richard Nixon takes the US dollar off the gold standard, which had been in place with minor modifications since the Bretton Woods Agreement of 1944. Under this system, all currencies of the postwar powers was pegged to the USD and the USD was convertible to gold at a price of $35 per troy ounce. However, maintaining convertibility between USD and gold made it difficult for the US to manage rising inflation and Balance of Payment deficits. (As the US purchased more imports, it would pay in dollars. This is effectively the same as an outflow of gold as dollars could be converted to gold at a fixed ratio). The more the US imports, the lower its reserves of gold.
Accordingly, in 1971, Nixon moved to ban convertibility of US dollars into gold. Initially, this was designed to be a temporary measure. Without a gold standard, the Fed and the US government have been free to increase money supply without restriction.
1980: Gold hits a record high of $850 an ounce, as investors demand for gold bullion spiked due to high inflation caused by strong oil prices, the Soviet intervention in Afghanistan and the impact of the Iranian revolution. This shows how gold acts as a hedge against inflation and a safe haven asset during geopolitical turmoil.
1980 -1999 Gold bear Market. Over the next two decades, gold prices continued until they reached a low of $254/oz in 1999. This was largely due to:
- Increased supply. The annual output of gold doubled as new technology greatly reduced the cost of mining gold
- Prudent monetary policy, low inflation and geopolitical stability, which led Europeans to liquidate gold and buy risk-on asset classes
2008-2011: During the Global Financial Crisis, Gold prices rose from $750 to $1900 in. Gold performs particularly well during debt/monetary crises, as the solvency of systemically important financial institutions becomes questionable. Credit markets froze, and stock markets sold off. Gold was the only remaining “safe haven” asset.
2012-2020 Equity Bull market. Equity prices start to roar following the recovery of the world economy from Global Financial Crisis. This causes gold prices to fall as investors pour money into the S&P500. Gold prices drop from a high of ~1800 to a low of ~$1050 (a drop of ~40%) from 2012 to 2016. Gold prices range between $1,100 and $1,400. Gold starts to pick up mid-2018 amidst fear of overheating, and emerging geopolitical tension between China and the US.
2020+ Global Pandemic: During the pandemic, gold prices soared ~37% from $1447 to $1985 as gold resumed its traditional role as a safe haven asset. Fears of excessive printing of money (fiat debasement) combined with a potentially low growth outlook encouraged investors to shift away from equities into gold.
Since July 2020, investors started to look past the pandemic and saw increasingly better value in equities, which have been buoyed by a combination of cheap debt, increased income (due to transfer payments and rising asset valuations), resurgent global demand and supportive positioning by the Fed.