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The dramatic rise of gold since 1971

Topics [ gold prices ]

With an annual average price growth of almost 9% since the start of the 1970s it is little wonder that astute investors continue to hold the precious metal in their portfolios.

In this blog we look at what has moved the gold price since the pivotal year of 1971.

Prior to this date, the price of gold had not moved substantially for hundreds of years.

This can be attributed to the gold standard, an international monetary system subscribed to by trading nations during the 19th and much of the 20th centuries.

Essentially, it required each currency to be redeemable for gold and for the price of gold to be fixed. In 1900 the gold price was set at USD 20.67 per ounce. In 1933 the price was amended to USD 35.00.

But in 1971, amid stagflation (economic stagnation accompanied by inflation), use of gold to back the US dollar was abandoned in favour of ‘fiat’ or government-issued currency. Most major countries adopted a floating exchange rate system – and the price of gold was henceforth determined by market forces.


In 1976 the price of gold shot up to USD 120 and by 1980 it was at a record high of USD 850 per ounce. The 1980 rally was driven by a raft of financial and geopolitical crises – the Iranian revolution, the oil price spike and the Soviet invasion of Afghanistan.

In resorting to gold, investors demonstrated their faith in its historical role as a safe haven in difficult and dangerous times.

As the decade progressed, Western countries gradually reined in inflation and unemployment. Gold fell out of favour somewhat as the New York Stock Exchange index nearly quadrupled, going from just over 500 to almost 2,000.

Amid strong economic growth in the 1990s, interest in gold declined further and at less than USD 300 an ounce at the beginning of the new century, the investment case for gold appeared weak.

Astonishingly, though, the metal was about to embark on its most powerful bull run in history. Over the ensuing decade the price was destined to increase eightfold, peaking at just over USD 1,900 an ounce in 2011.

The backdrop to this incredible rise was one of international emergencies and financial turmoil. Key events of the period include the 9/11 terrorist attacks, the invasion of Iraq, and the granddaddy of them all from gold’s perspective, the financial meltdown of 2007, the ensuing global financial crisis and efforts to contain its worst impacts through quantitative easing.

In reaction, seasoned investors sought gold as a hedge instrument – a position with the potential to offset losses in other assets within an investment portfolio.

At the same time, central banks began a buying spree, with China for example raising its gold reserves from just. 600 tonnes in 2002 to 1,054 tonnes between by 2009. They have continued to buy in the decade since, with official gold holdings now approaching 2,000 tonnes.

It wasn’t just China that was buying, with central banks in a number of other countries including Russia, India, Kazakhstan, Korea, Mexico, Poland, the Philippines and Thailand also adding to their reserves, with low to negative interest rates and successive rounds of quantitative easing across the developed world encouraged predominantly emerging market central banks to diversify their foreign exchange reserves.


And with the hype around the rising gold price, a large number of speculators also jumped on the precious metal bandwagon.

Where are we today?

From its peak, gold declined to around USD 1,000 at the end of 2015.

From April 2013 until just recently, there has been a lack of significant volatility in the gold price, which has traded in a band of between USD 1,000 - 1,450 per ounce. Even at this level, however, gold is at historically high levels.

In 2016 the gold price began trending higher again (and in Australian dollar terms has continued to post new highs since June 2019).

Some commentators see this as the beginning of a new bull market for gold. The factors they use for this argument include:

• Gold has re-established its reputation as a safe haven after doubters appeared to question this in recent years.

• Interest rates remain low and appear to be going lower still, encouraging investors to chase returns in shares and property which may be reaching bubble territory in some parts of the developed world.

• Geopolitical and trade tensions remain high – Brexit, the Iranian nuclear deal and US-China trade talks are among key issues contributing to current disquiet.

• Central banks worldwide continue to signal their concern by buying record levels of gold.

Without doubt, this is a powerful mix of factors with the potential to continue gold’s exhilarating ride since 1971.



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Gold hits all time high in Australian dollars

Topics [ gold analysis gold prices gold bullion prices ]

Gold continued to rally last week, with the price in United States Dollars at one point surging beyond USD 1,350oz. In Australian dollars, it hit a new all-time high above AUD 1,950oz, continuing a strong upward trend that has been in play since late April this year.

The table below shows the price of gold and silver (in both AUD and USD), as well as the performance of the S&P500 and the ASX 200 over the past week, month and year. It shows gold outperformed equity markets, though silver lagged.

The rally in gold has been driven by a handful of factors which include - 

 • A continued plunge in global bond yields, with US 10 year bond yields now sitting at just above 2%. Since late 2018, the market value of debt trading with a negative yield has almost doubled and currently sits at approximately USD 12 trillion, according to a 17 June article published in The Financial Times. 

 • Expectations of monetary easing by the US Federal Reserve (Fed). Some economists see the Fed cutting interest rates as soon as July 2019, with PIMCO, the world’s largest bond fund manager, suggesting the Fed might cut rates by 0.50% if “tensions between the US and China are not at least scaled down before or during the G20 meeting in late June”.

 • Escalating geopolitical tensions in the Middle East, with two oil tankers attacked in the Gulf of Oman last week.

Australian dollar investors in gold have also received a boost from continued weakness in the local currency, which is back below USD 0.69. Markets are now pricing in at least two more interest rate cuts by the Reserve Bank of Australia (RBA) over the next year.

If the RBA delivers what the market expects, we may see added demand for precious metals, especially if it’s accompanied by continued media speculation about the potential for quantitative easing (increasing the money supply) in Australia.

High Profile Investors Turning to Gold

Given the recent rally in gold, it is no surprise to see it find favour among high profile investors. Stephen Innes, Head of Trading and Market Strategy for Vanguard Markets, stated in an article published on 17 June: “Gold is reclaiming its rightful status as a must-have safe haven asset in everyone’s investment portfolio”.

Innes went on to state that he is “unwaveringly bullish on gold and continues to buy as it remains one of my highest conviction trades into 2020.”

DoubleLine Capital’s Jeffrey Gundlach, known in financial markets as the “Bond King” stated he was long gold in an investor webcast last week. He noted that he expected the US dollar to fall between now and the end of 2019, while he also sees a greater than 50% chance the US will enter recession within one year.

Finally, billionaire Paul Tudor Jones, fund manager and founder of Tudor Investment Corporation has said gold is his favourite trade for the next 12-24 months. In an interview with Bloomberg last week, Jones noted that gold has “everything going for it” and that if the price can push through USD 1,400oz, it will get to USD 1,700oz “rather quickly”.

Of course, it must be said that prices aren’t guaranteed to rise and after a 5% rise over the past month, some consolidation would not be unexpected. Nevertheless, we remain optimistic about the medium to long-term outlook for gold. We believe it should be on the radar of most investors given its unique qualities and the benefits it can bring to well diversified investment portfolios.


Sources:

Gundlach Quote

https://www.cnbc.com/2019/06/13/bond-king-jeffrey-gundlach-i-am-certainly-long-gold.html

Tudor-Jones Quote

https://www.kitco.com/news/2019-06-12/Gold-Price-Going-To-1-700-Soon-Says-Billionaire-Paul-Tudor-Jones-Bloomberg.html

https://www.youtube.com/watch?v=iNjOptP7jJ4

Negative Yielding Debt

https://www.ft.com/content/cf39a9a4-8ea2-11e9-a24d-b42f641eca37

Stephen Innes

https://www.fxstreet.com/analysis/gold-fever-is-spreading-201906170714

Disclaimer

Past performance does not guarantee future results.

The information in this article and the links provided are for general information only and should not be taken as constituting professional advice from The Perth Mint. The Perth Mint is not a financial adviser. You should consider seeking independent financial advice to check how the information in this article relates to your unique circumstances. All data, including prices, quotes, valuations and statistics included have been obtained from sources The Perth Mint deems to be reliable, but we do not guarantee their accuracy or completeness. The Perth Mint is not liable for any loss caused, whether due to negligence or otherwise, arising from the use of, or reliance on, the information provided directly or indirectly, by use of this article.



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October effect may lie behind heightened interest in gold

Topics [ gold prices ]

We’re now a little over half way through the 10th month but the ‘October effect’ has seemingly jangled investors’ nerves again.

Some of the most notable stock market crashes have occurred during October, including the Panic of 1907, Black Tuesday (1929), Black Thursday and Black Monday (1929), as well as Black Monday (1987).

Volatility in global markets amid growing trade tensions, rising US interest rates and troubles in Europe with Brexit and Italian fiscal policies has some fearing another potential market correction.

Traditionally, gold has been the go-to asset in times of fear thanks to its historical negative correlation with equities and its ability to withstand depreciation over time.

 

However, following the GFC it has been hard to hold this traditional view.

Recently investors have witnessed any number of potentially destabilizing events but have remained largely indifferent to gold, maintaining confidence in the world economy to weather the storms.

That’s why it was interesting to read this article by Luke Burgess on Energy & Capital arguing that the price of gold is once again acting ‘normal’. For the first time in a long while, he sees a “return of normal trading behavior, where gold is actually used as a safe haven asset to hedge economic and market risk.”

One reason may be the number of bearish reports that are casting severe doubts over continued global growth.

Highlighting an increase in the level of risk among multiple global metrics, this week’s IMF Global Financial Stability report came hot on the heels of the recent sell-off of equities in the US, Europe and Asia – and the flight to safety in the form of gold.

The World Gold Council discusses the IMF report further in its latest Investment Update, which is available for download here.



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How the USD/AUD exchange rate is supporting Australian gold price

Topics [ gold prices ]

The gold price is making headlines for all the wrong reasons.

On Monday, gold futures in New York dropped back to their lowest finish since December, ending the trading day at USD 1,241.70 an ounce.

Here in Australia, some media have referenced gold’s losing streak. However gold, like other commodities, is traded internationally in US dollars. This means media reports often fail to point out the impact of the AUD/USD foreign exchange rate on the local price of gold.

The red line on this graph represents the price of gold in US dollars which in January topped USD 1,300. Slipping below this level for the first time in May, it declined consistently in June.

This movement coincided with a marked strengthening of the US dollar against other world currencies, including the Australian dollar.

The result of such a move in the exchange rate has the effect of supporting the local price of gold.

The AUD/USD rate has now declined from 0.81 at the end of January to around 0.74, meaning one Australian dollar is now worth about 74 US cents. The graph’s blue line represents The Perth Mint spot price over the same period. It demonstrates how the decline in the value of the Australian dollar relative to the US dollar has helped protect the value of Australian investors’ gold holdings in terms of their own currency.

Looking at this from another perspective, those who bought in January actually saw an increase in the value of their gold holdings priced in Australian dollars.



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Gold price to stay stable says Chief Economist

Topics [ gold prices ]

Investors prepared to hold gold over the long term will be encouraged by the latest findings from the Office of the Chief Economist at Australia's Department of Industry, Innovation and Science.

According to its latest forecast, the price of gold will be driven by the metal’s safe haven status to an average of USD 1,350 an ounce in 2019.

Following a predicted drop in the price of gold in 2020, declining world mine supply will help it regain momentum in 2021-23.

Publishing details of its analysis in the March 2018 edition of Resources and Energy Quarterly, the Office says it expects Australian dollar gold prices to remain steady over the outlook period as higher world prices offset unfavourable moves in the exchange rate.

According to experts, gold can play a valuable role in any investment portfolio. An asset that’s been shown to withstand depreciation over time, gold has traditionally displayed a negative correlation to equities and may play a role in mitigating overall losses in volatile markets.



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2017 LBMA Precious Metals Forecast Survey reveal analysts are bullish

Topics [ gold prices silver prices ]

Thirty analysts representing twenty six different companies participated in the London Bullion Market’s latest annual Precious Metal Forecast competition.

Contributors were bullish across the board for the four key investment metals, with analysts forecasting that the average gold price in 2017 will be 5.3% higher than the average price in the first half of January 2017.

They were slightly more bullish about the prospects for silver prices, with an increase of 7.1%, but less bullish about PGM prices. For platinum, they forecast an increase of 4.9%, but expected a more modest outlook for palladium, with a forecast increase of just 2.4%.

The full 2017 LBMA Precious Metals Forecast Survey, including each analysts’ supporting commentary, can be downloaded here: www.lbma.org.uk/assets/Forecast_2017_Interactive.pdf



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