TMR - GOLD HISTORY

Originally published fall, 2006 - Revised January 15, 2007

Gold appears to be in a truly pivotal time frame as this is written in mid-January 2007. The retreat from its quarter century high of $730 in May, 2006 drove gold below $600 per ounce before recovering to its present level and the great question remains: “Is gold in a corrective phase of an ongoing bull market, destined to break out once again to new highs - or - is this decline the beginning of a new and prolonged precious metals bear market?” Perhaps the answer to that intriguing question lies in the yellow metal’s price history itself.

No metal on earth has ever had the importance of gold. It has been regarded as wealth on earth since the beginning of recorded history. Wars have been fought over gold and even the rise and fall of the Roman Republic, later the Roman Empire, which lasted for a thousand years, can be measured in its accumulation of golden wealth. Roman coins forged from gold, silver and copper were currency on earth.

That tradition remained throughout European, North American and even Oriental civilizations until the 20th Century. Every attempt to create currencies based on unbacked paper failed miserably, such as the monetary inflation in France and the creation of paper Continentals in America, both during the latter part of the eighteenth century.

However, as the Twentieth Century progressed, for various reasons, the world turned away from currencies of gold and silver, or those backed by the precious metals and adopted the wholesale use of unbacked, fiat, paper currencies, culminating in the final closing of the gold convertability window by America in 1971. And with that change, the price of gold began to fluctuate dramatically - and has ever since.

Up until the late 1960’s, the price of gold in terms of US dollars was set by the American government, ranging from $21 in the early twentieth century to $33 during the Roosevelt revisions of 1933, and later, $41 by President Nixon in 1971. However, conservative investors, recalling the utter failure of every currency in history, began to acquire gold holdings and the market price for gold began to rise above the official quotation. Gold began to be traded on commodity exchanges and the American government passed a law which enabled the private ownership of gold at the end of 1974. From early 1971 to year-end 1974, gold soared to $200 per ounce during the first great modern golden bull market.

But the optimism was short-lived and gold began to fall, reaching a major low of $100 per ounce in the summer of 1976. However, important fundamental changes began to occur, each one favourable to the precious metals market. Inflation began to rise, slowly at first, but then more rapidly, eventually reaching twenty percent. Interest rates began to climb relentlessly, also reaching twenty percent. Political confidence in the ability of government to solve problems diminished, particularly during the Jimmy Carter years. The “Twin Towers”, reflecting the US National Debt and the US Budgetary Deficits, rose to historic highs. Oil embargoes took place, driving the price of gas relentlessly higher and also spreading fear and uncertainty. And, finally, the invasion of Afghanistan by the Soviet Union seemed to open the door to direct confrontation between the superpowers of the era.

In a 42 month period between July 1976 and January 1980, gold began to rise at an ever-accelerating rate, breaching $200 per ounce in August, 1978; $300 in June, 1979; $400 in September, 1979 - and then embarking on an amazing rush to its final peak of $870 on January 21, 1980. Fortunes were made in all manner of gold trading - but it all ended with an agonizing smash, eventually bringing gold down to below $300 by mid-1982. 

During the next twenty years, gold enjoyed periodic rallies, such as 1983 and 1987 when gold returned to $500, but for the most part, the two decades were characterized by quiet, dormant, and gradually sinking precious metals markets, finally bottoming out close to $250 per ounce in both late 1999 and in early 2001. During those two decades, inflation abated, political stability improved, industrial expansion took place, petroleum markets were predominantly stable and interest rates steadily declined from their previous high levels. 

Finally, after that second bottom, gold began to rally in a sustained manner, rising up through $300, $400, $500 and eventually reaching the aforementioned $730 this past May.

The great speculation, then, is this: are overall fundamental conditions gradually turning toward those which sustained the great two-part bull market of 1971-1980 - or are they likely to reflect the relative stability of the long precious metals ‘drought years’ of 1981-2001?