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Monday, January 14, 2008

What Happened to the Gold Price in 1980?

In January 1980 gold hit a record 850 US dollars an ounce. After reaching those dizzy heights it then plummeted down and remained steady in the 300-400 dollar range for some years before starting to climb again to new levels.

Now gold has broken through the 900 dollars an ounce gold barrier and some investors and analysts are wondering, is this going to be a repeat of the 1980 gold spike?

In fact, there are many differences between the 1980 spike in the gold price and the current rise in gold value, not the least of which is the longer term trend currently occurring. In 1980 gold basically shot up like a bullet out of a gun and then, like a bullet, slowed down and returned to earth.

History
In January 1980 gold was fixed at a record 850 USD an ounce while high inflation, strong oil prices , Soviet intervention in Afghanistan as well as the impact of the Iranian revolution prompted investors to heavily buy the metal.

Adjusting for inflation, meant the 1980 record high price was actually $2,079 an ounce at 2006 prices, while, according to precious metals consultancy GFMS, the real average price in 1980 was calculated at $1,503.

As a result of the removal of the gold standard by Nixon in1971, what little life was left in the Bretton Woods, built during the devastation of World War II to help Europe recover its faith in credit and currencies agreement was killed off. The result?

"Inflation in most countries at the end of 1979 was running in double digits," writes Peter Bernstein in his classic The Power of Gold. Pointing to the OPEC-led spike in oil prices, he also notes that "political conditions were perhaps even more frightening."

"Iranian radicals in Nov. 1979 took over the US embassy in Tehran…At the same time, the Russians were building up their strength in southern Yemen near Saudi Arabia, near Afghanistan’s border with Iran, and near Bulgaria’s border with Yugoslavia."

Key Dates in Gold History
Here are some key dates in gold's trading history covering the period from the early 1970s through to January 2008 including that period when gold rose, fell and, like the phoenix, has risen again.

In August 1971, took the dollar off the gold standard. With some minor variations this had been in place since the Bretton Woods Agreement of 1944 and fixed the conversion rate for one Troy ounce of gold at $35.

In August 1972, United States devalued dollar to $38 per ounce of gold.

In March 1973, Most of the major countries adopted a floating exchange rate system.

Then in May 1973, the United States devalued dollar again, to $42.22 per ounce.

January 1980. Gold hits record high at $850 per ounce. High inflation because of strong oil prices, Soviet intervention in Afghanistan and the impact of the Iranian revolution, which prompted investors to move into the metal.

In August 1999, gold fell to an all-time low at $251.70 on concerns about central banks reducing gold bullion reserves while, at the same time mining companies were selling gold in forward markets to protect against falling prices.

In October 1999, gold reached a two-year high at $338 after an agreement by 15 European central banks to limit the gold sales.

During February 2003, gold reached 4-1/2-year high on safe-haven buying in the run-up to conflict with Iraq.

Then in December 2003 to January 2004, gold broke above $400, reaching levels last traded in 1988. Investors started to increasingly buy gold as risk insurance for portfolios.

In November 2005, the spot gold rises above $500 for the first time since December 1987, when the spot hit $502.97.

April 11, 2006, and gold prices then surpass the next big level of 600 US dollars an ounce, the highest since December 1980, with funds and investors pouring money into commodities on a weak dollar, firm oil prices and geopolitical worries.

May 12, 2006, saw gold prices peak at 730 US dollars an ounce This was the highest level since January 1980, with funds and investors pouring money into commodities on a weak dollar, firm oil prices and political tensions over Iran's nuclear ambitions.

June 14, 2006 gold falls 26 percent to $543 from its 26-year peak after investors and speculators went on a flurry of profit taking.

Nov 7, 2007, spot gold peaks at a 28-year high of $845.40 an ounce.

Jan 2, 2008, gold breaks above $850 for the first time since 1980.

Jan 8, 2008, gold hits record $875.80. (Sources: GFMS, World Gold Council, Commodity Research Bureau and Reuters database).

Jan 12, 2008, Now gold has breached 900 dollars an ounce and looks set to reach the magical 1000 US dollars per ounce.

Why Gold
Some similarities can be found between the two highest evers but there is a marked difference between the two that show this latest high is not a spike but a continuing trend.

In James Turk's "2008 Gold Should Glitter", he comments
"Although gold’s previous record high of $850 reached in January 1980 gets attention, rarely do people consider that a 1980-dollar had substantially more purchasing power than a 2007-dollar. Adjusting for 27 years of inflation, it takes $2,208 today to equal the purchasing power of $850 in January 1980. So by this measure, gold is still far from a true record high."
He follows this on with:
"Another useful measure to determine gold’s relative value can be made by comparing gold to the Dow Jones Industrial Average. Gold is overvalued when it takes only one ounce to buy the DJIA. For example in the 1930s, one ounce of gold at $35 bought the DJIA, and it did so again in 1980 when an ounce of gold was $850 and the DJIA was 800. Though this ratio has fallen from more than 40 ounces in 2000, it still takes 16 ounces of gold to buy the DJIA, meaning that gold continues to be a relatively good value while the DJIA is relatively expensive …."
So gold is still relatively, undervalued, or "cheap" as it were, and there is still a long way to go for it to catch up to inflation.

The current rise is being helped of course by the current situation in the US and the increased level in oil price but these are really contributory rather than causative.

What is causative is the general trend of investors having less faith in fiscal currency. Two component parts of the current economy is the passion by governments for printing more money to handle debt and debt crisis. And the other is the banking fractional system which allows banks to 'creatively create money for the purposes of debt. Both these forces oppose each other creating, in their wake, a rising tide of inflation and recession.

This is perhaps, unconsciously, understood by most people as not a good thing. They see this in their pockets with prices rising, less money available, and more restrictive practices surrounding their control of finances.

All this despite hot mint printing presses actively at work printing more money while banks offering more debt yet at the same time struggling with the debt they have.
This is likely to be the biggest cause of the investors, and even the man in the street's attention being turned to gold. And this is not something that is going to go away anytime soon.

Golds Future
Many analysis are predicting further increases in gold. Of course there will always be the inevitable "correction" as it is called. This is where those investors, in for the short term, decide to take a profit and the price then drops for a while. But with gold currently undervalued and with the prime economies on what could be called a long term unsteady footing, there is plenty of room for gold to continue its steady rise to, some say, over the 2000 dollars an ounce mark.

So it seems the value of gold has a lot of catching up to do



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