Marking history in gold

Many of history’s defining moments have been marked by the gold price. In the last half century, the peaks and troughs of the US dollar gold price have coincided with significant events on the world stage, politically and financially.

On a sunny morning in August 1971, we saw gold released from its $35/oz Bretton Woods peg by US President Nixon as a French warship sailed into New York harbour to collect the French Republic’s holdings from The Federal Reserve Bank’s vaults, citing ‘dollar imperialism’.

In January 1980, with the backdrop of the Iranian revolution and subsequent hostage crisis, coupled with the Soviet invasion of Afghanistan, Jimmy Carter handed over the US Presidency to Ronald Reagan. The US inflation rate was 15% and gold peaked at $880/oz.

Two decades of prosperity later, that saw the Berlin Wall and communism fall, gold had fallen to a low near $250/oz. As the Euro currency was officially launched in 2000, worries about Y2K saw central bank liquidity drive the dot-com stock market boom to nose-bleed valuation levels. Gordon Brown, the UK Chancellor, at the time saw fit to sell off 395 tonnes, almost half the UK’s gold reserves over a course of 17 auctions. The low-point, became known in gold circles as the ‘Brown Bottom’, with later calculations focussing on how much his actions has cost the UK Treasury.

The worst financial crisis in 100 years in 2008-09 saw the largest monetary printing experiment in history as central banks dropped interest rates to zero and brought a new word of Quantitative Easing/Money printing to the lips of the average person. Gold rose to its lifetime high of $1920/oz in September 2011, as the world stock markets stumbled again.

In US dollar terms, gold’s volatility has seen multi-fold price rises and subsequent large declines several times in that period. These movements and the zero-yielding nature of the asset class have led negative comments over the years from many legendary investors, such as Warren Buffett.

But while the US dollar remains the world’s reserve currency for now, and key asset classes like gold and oil are nominally priced and discussed in US dollar terms, the world is very much more global now than it has ever been. Even gold investors themselves tend to think far too much about the vagaries of the gold price in US dollar terms and not in their own and others’ currency terms. But a brief look at the table above, shows the real stability of gold’s return profile. Note, that the return profile of gold in CAD terms at 5% is not significantly higher than the 3.8% in US terms, but whereas gold in US terms had only six up years, in CAD terms it had nine.

While the solid return profile for non-US investors in gold in the developed market currencies shows strong performances, it becomes more obvious if we include the emerging market currencies. Whether it is the BRICS, (Brazil, Russia, India, China and South Africa) or the large economies of Turkey and Nigeria, the reasons for investing in gold to protect against home currency weakness becomes very apparent and we haven’t even added the basket cases of the Venezuelan Bolivar or the Iranian Rial!

No matter where you live in the world, especially outside of the US, whatever the global macro environment is, gold should be seen, not just as portfolio insurance, but as a crucial part of wealth enhancement and protection.