Gold market history

HOW DID GOLD get to its current all-time record highs?

   Once upon a time, gold really was money. Indeed, today's monetary system – of paper notes and nickel coins – began when London goldsmiths first gave a receipt to their clients for the gold that they stored in their vaults.

   By the late seventeenth century, these receipts began to change hands as a way of making cash payments. Gold in safe-keeping was as good as gold in your hand, and the receipts gave clear proof of gold ownership.

   Why spend money moving the gold when all that mattered was the change of ownership?

Gold Bullion Investment: The end of the Gold Standard

   Today, however, the paper notes and nickel coins we call "money" have no backing in gold. Great Britain and the other major European powers came off the Gold Standard in the 1920s and '30s. Switzerland stopped backing each Franc that it issued with gold in 1936.

   Three decades later, the United States finally cut the world's supply of money free from gold when it stopping swapping Dollars for bullion at the Federal Reserve in 1971.

   Over the nine years that followed, the price of gold in Dollars rose more than 23 times over.

   The world's central bankers finally accepted that killing inflation meant putting the economy in danger with much higher interest rates. The US Fed chairman, Paul Volcker, hiked Dollar interest-rates to almost 20% – and that fantastic rate of return finally put a stop to the great bull market in gold.

   The Gold Price sank for the next 20 years, falling lower as the world's monetary system stabilized. Debt, credit and high-growth shares thrived as interest rates were then allowed to slip back. Gold just couldn't compete.

Gold Bullion Investment: Gold & the Tech Stock Crash

   But fast forward to the start of 2003, when world stock markets finally turned higher after the Tech Stock Crash had destroyed half of New York's Nasdaq index, and professional traders who dared to peep through their fingers at the financial markets found two asset-classes already making a strong, solid move higher.

   One asset was government bonds, driven higher in price by central bankers the world over slashing interest rates to kick-start the stock market. The other asset – long forgotten – was gold bullion.

   Gold bullion investments had risen by 25% against the US Dollar since the Dot Com Bubble peaked in early 2000 – and professional investors just love buying assets that are clearly enjoying a bull market. So along with stocks, bonds and emerging markets, they began to Buy Gold, and to buy gold heavily.

   All that cheap money pouring out of central banks in the US and Europe made Gold Investment attractive to mainstream funds for the first time since 1980. Why? Because "people rightly buy gold when they see inflation ahead," as William Rees-Mogg, former editor of the London Times and an advisor to Margaret Thatcher in the early 1980s, said at a private meeting of investors recently.

   And a surge in the supply of money, most often led by low interest rates, sits at the heart of every runaway inflation in history.

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Or click the right-facing arrow below to read about Gold Bullion Investment: Gold vs. Inflation...