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Historical Trends In Precious Metal Prices
As investment grade metals, the historical prices of gold, silver, platinum and palladium are influenced by several factors at play in the economy. Gold, in particular, has played a significant role as a currency, safe haven and a trusted asset for wealth preservation for ages. It is closely tied to economic, financial and geopolitical events that take place globally.
In this regard, historical gold prices and that of other precious metals go through cyclical trends depending on the state and confidence in the global economy. The actions of central banks, trends in the bond and stock markets and political events with a bearing on the economy influence precious metal price movements.
The reason for this is both economical and emotional. Individuals, corporations and even governments consider precious metals a safe and dependable haven in times of crisis. Even during boom times, central banks and financial institutions stockpile gold and silver as a safeguard against unforeseeable fiscal and economic meltdowns.
Gold, as well as historical silver prices, can be traced back centuries. In fact, a great comparison of the value of gold can be made between its price today and that 2000 years ago during Roman times. Back then one ounce of the yellow metal was sufficient to buy a gentleman’s outfit. Fast forward today and the same is true.
This simple fact underscores the inherent value of gold, which is something that cannot be said about fiat currencies and other correlated assets.
Growing industrial demand and diminishing supplies
Aside from their investment value, silver, platinum and palladium are widely used in technology and industry. Like any other commodity, their prices are influenced by supply and demand. Silver, in particular, has a great and ever growing demand in several industrial sectors. It is used in film production, photovoltaic cells, medical equipment, mobile phones, home appliances, batteries and of course, jewelry.
Historical platinum prices are also determined by its value as a form of jewelry, in medical devices, electrodes and catalytic converters. It is also true for palladium, a critical component of automobile catalytic converters. Their rarity, value and demand make these four precious metals investment grade hedges to economic and geopolitical uncertainties.
As the supply of precious metals continues to wane due to diminishing reserves and increased costs of extraction, their prices are set to continue an upward trend despite near term consolidations.
As outlined below, precious metal prices have surged in times of economic and political instability and will continue to do so decades from now. Even during short-term dips in price, gold and other precious metals still, maintain record highs when compared to historical price levels.
In this new era of unprecedented currency devaluations, ballooning government debt, political turmoil and uncertain economic policies, precious metals remain the real hedge against inflation and assets for wealth preservation.
The 1971 Abandonment Of The Gold Standard
One significant milestone that had a huge bearing on historical gold prices occurred in 1971 when the Nixon administration decided to abandon the convertibility of the dollar to gold altogether. After WWII, the Bretton Woods agreement ensured that the dollar was pegged to gold while other international currencies were pegged to the dollar.
International balances were settled in dollars, while the US, holding three-quarters of the world’s gold stockpile, had the responsibility of ensuring the convertibility of gold to the dollar at a fixed $35 per ounce.
However, widening balance of payments, increased foreign aid, inflation, unemployment and military spending made the system vulnerable to a run on gold as dollar supplies increased globally while the gold supply increased only slightly.
Nixon had no choice but to abandon the gold standard and make the dollar a fiat currency, no longer backed by or convertible with gold. It was a major policy decision that saw the gold price rocket from $35 to $179 by 1975 and to record highs of $870 by January 1980.
It began an era of free-floating and unstable currencies, which persists to this day. The Federal Reserve was then able to print as much money whenever it so wished. Ever since, the gold price has appreciated to new record highs, albeit with short-term consolidations.
The threat of inflation is a major factor as far as gold and other precious metal prices are concerned. Inflation occurs as the money supply increases, resulting in devaluation of fiat currencies and an increase in the prices of products and services in the economy.
The high inflation witnessed during the 70’s pushed gold and silver to record highs. This trend has been replicated several times when the fear of inflation surfaces in the global economy. With their inherent value, precious metals are considered a hedge against inflation.
Unprecedented Levels of Public Debt
The economic crisis of 2008 resulted in unprecedented levels of money printing by central banks worldwide. As the credit crunch unfolded, the Federal Reserve, European Central Bank and other central banks worldwide embarked on the so-called “quantitative easing”, which is nothing more than the wholesale printing of money.
This ballooned government debt by trillions of dollars as central bank balance sheets rose significantly. Governments will at one point have to meet these debt obligations, which will result in a debt crisis far larger than seen in Europe recently.
Although yet to be realized, this has left the global economy at a risk of severe inflation, which could seriously affect asset prices. Gold and other precious metals as inflation hedges will see sustained higher prices once central banks begin to reduce the size of their balance sheets.
The 2008 debt crisis repudiated long held fallacies about portfolio diversification. The crisis clearly showed that bond, stocks, real estate and commodities are correlated and therefore cannot form a genuinely balanced investment portfolio.
While the stock, property, commodity and bond markets crashed, gold and precious metals soared to record highs with investors and governments looking for safe havens. This trend was also witnessed during the 1987 stock market crash and the tech bubble burst of 2000.
Volatility persists in equity markets around the world, as was recently seen in fall of the Shanghai stock market.
Lower fears of inflation and better than expected economic performance in the US may have rallied markets recently. However, systemic risks posed by high student debt, underfunded social security and 401(k)s, ballooning trade deficits and excessive government spending will in a matter of time lead to yet another meltdown.
The only way to completely balance and safeguard your portfolio is by incorporating precious metals into your investments. It can be done through gold and silver bullion purchases or more conveniently via tax efficient precious metal IRAs.
Global Geopolitical Concerns
The world faces several geopolitical risks that have no end in sight. The growth of radical Islam, terrorism and recently, IS has threatened global prosperity on several levels. The fall of long-standing regimes in the Middle East after the Arab uprising destabilized the region, made way for radical groups, threatened global oil supplies and trade routes through the area.
Other geopolitical conflicts in areas such as Crimea, Yemen, Korean Peninsula and the South China Sea are also a significant threat to the global economy. These events have dampened global economic growth and increased fears of a wider crisis.
As long as these conflicts persist, the outlook for precious metals will no doubt remain bullish.
Significant Milestones In Historical Gold Prices
1971: The Nixon Administration ends dollar-gold convertibility, which stood at $35 per ounce since the 1944 Bretton Woods Agreement.
1972: The US government devalues the dollar to $38 per ounce of gold, followed a year later by another devaluation to $42.
1973: Major governments around the world adopt free-floating exchange rates.
1980: Gold soars to a record high of $850 driven by high oil prices, the Soviet-Afghan War and the Iranian Revolution.
1987: Gold rises to $481 during the Black Monday stock market crash before settling back to $464, but hit the $500 mark by Dec of that year.
1997: The Taxpayer Relief Act expands the precious IRA to include platinum and palladium alongside gold and silver bullion. A precious metal IRA makes it simple for investors to truly diversify their investment portfolios in a tax efficient manner without the need to buy physical metal.
1999: Gold falls to $251 on fears of a massive gold sell-off by governments and the IMF, while gold mining corporations sell in the futures market to hedge against falling prices. The price rises to $338 as 15 EU states agree to limit gold sales.
2003: The run-up to the Iraq invasion sends gold to a 4-year high of $358 before surpassing the $400 mark and reaches $414 by the end of the year. Investors are attracted to gold as a safe haven as geopolitical risks persist.
2005: Gold prices reach 18-year highs as Russian gold reserves are set to double and the Federal Reserve stops publishing M3 numbers, (number of dollars in circulation).
2006: The gold price hits $600 in April ‘06 for the first time in 26 years, as fears of Iran’s nuclear ambitions, high oil prices and a weak dollar send investors into haven gold assets. The price peaks at $730 by May ’06.
2008: Turmoil in the equity markets sends gold past the $850 mark as the mortgage crisis unfolds, before going over $1,000 an ounce for the first time and setting a record high $1,030/oz price, including a record $90 a day gain on 17th Sept ’08.
2009: Gold Exchange Traded Funds see record 45% inflows between Jan and Mar as investors seek a haven amid the economic crisis. China announces it has raised its gold stockpile by three-quarters since 2003, and the price hits a record $1,226/oz as central banks further diversify into gold.
2010: The gold price marks another high of $1,264 as volatility and fears of the recession continue. Sustained quantitative easing by the Federal Reserve sends gold to $1,375 by Oct amid increased pressure on the dollar. The price rockets to $1,400 in Nov as Ireland faces budgetary pressures and then hits $1,425 as the Euro debt crisis unfolds.
2011: The Euro debt crisis and unrest in the Arab world send gold to record highs of $1,465, before hitting a record of $1,920 on fears of a US government debt default as Congress remains deadlocked. 2011 also saw the largest demand levels for gold, running over $200billion for the first time, at a tonnage of 4,067, the highest since 1997.
The gold price has experienced several corrections since then as fears of a global meltdown ease. Stock markets have rallied with better than expected economic stability in the US and EU, and a containment of the EU debt crisis.
However, unprecedented levels of government debt, high budget deficits, repercussions of the Brexit vote, an ageing population worldwide, and the threat of war globally pose serious risks to the economy and financial markets.
Gold and precious metals will remain the real safe havens for decades to come as a result of these persistent risks to the global economy. As such, historical gold prices will continue to outperform other asset classes and make precious metal IRAs an indispensable part of every investment portfolio.