Gold and Dollar: Chronicle of a Divorce
- mmbilbao9
- 17 ene
- 4 Min. de lectura
How has the dollar to gold relationship changed over time? Discover how, over the years, the US currency has lost purchasing power while gold steadily increased in value.
The Bretton Woods agreement, signed in 1944 in New Hampshire USA, transformed the world economy. The agreement established that the US dollar was to be the global reserve currency, backed by gold reserves at a 1:1 parity, convertible to gold at US $35 dollars per ounce.
This tempting proposal facilitated commercial exchange between nations by replacing gold, which until then had been the usual means of payment to settle international transactions. By replacing gold by the dollar, a strong currency, practically equivalent to gold, eliminated the logistical inconvenience associated with the transportation and exchange of physical gold.
The Dollar Decouples from Gold
In 1968, the world experienced a surge in demand for gold, forcing the US government to make a drastic decision. Congress repealed the law requiring Federal Reserve notes to be backed by gold. From that point onwards the parity between gold and the dollar began to fluctuate, making economic stability more difficult to achieve and therefore harder to maintain at 1:1. As a consequence of this, countries with important US Dollar reserves began to ask the United States to convert them into gold, leading to a serious shortage in the precious metal.
As a result, in 1971, President Richard Nixon unilaterally decided that the US dollar would cease to be convertible into gold which was the end of the gold standard established 27 years earlier. Although at the time this measure was thought to be “temporary”, the reality is that it was never reversed and remains in force to this day..
The price of gold increased rapidly after the gold standard was removed. The price per ounce increased to, on average, US$58 dollars and US$97 respectively in 1972 and 1973.
Gold Reaffirms its Value
Over time it appeared that faced with acute economic instability and a weakening dollar, the value of gold stood firm. In the 1970s during the oil crisis and the Yom Kippur War in the Middle East, gold saw a sharp increase in value, reaching US$183 dollars per ounce by the end of 1974.
By 1980, gold price reached US$678 per ounce, driven by the Iran Revolution and the second oil crisis. Gold reaffirmed its status as a refuge of value, as its price increased while the US dollar and other currencies lost purchasing power.
End of the 20th Century: A Turning Point: Setbacks to Get Stronger
After the crisis of the 70s and 80s, the price of gold stabilised for while reaching on average in 1999 US $278 dollars per ounce. Investors who trusted its long-term value were poised to see results. The 2008 financial crisis proved to be another global catalyst for the value of gold. In the midst of global economic chaos, the price of gold shot up to US$869 per ounce, reaching for the first time in history, US$1,000 per ounce in March 2008.
The Dollar Roller Coaster, and the Rise of Gold
The performance of gold should not only be measured by its price, but also by its resilience during economic and political crises. In 2010, the price of gold reached a record US $1,296 dollars per ounce. In 2011, a new record was reached at US$1,895, as concerns that the United States could default on its debt emerged. This was followed by a gradual retreat which took the price of gold down to US $1,160 per ounce. By the start of 2020, Gold price had increased back up to US $1,517 per ounce, breaching US $2,600 dollars per ounce by the end of 2024, a 71% growth rate in just 5 years.
Gold, a Lesson in Value
The impressive surge in the value of gold against the dollar from US $35 dollars to US $2,600 per ounce over the past 50 years tells two stories: First, gold, is a valuable asset which has appreciated more than 7,470% during that period; and second, the dollar, a currency with no intrinsic value, has lost to date more than 98.7% of its value.
While the dollar and other fiat currencies are vulnerable to inflation and the volatility of geopolitics, gold has proven over the centuries that it preserves its value over time. This is clearly reflected in everyday examples such as the evolution of the price of a car, in dollars and gold, over the last fifty years or how the price of the iPhone has changed, in dollars vs gold, from the first model to the latest.
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