Gold and the dollar: a turbulent history
A timeless and unalterable metal, gold has been a symbol of power, divinity, or a powerful tool of religious art since ancient times. The King of Precious Metals, as he is frequently referred to, has been coveted by many. Gold has played a major role in the history of many civilizations.
January 22, 1848 is a date that saw the birth of a particularly strong link between gold and North America. That day, James Marshall, a worker at a sawmill under construction, discovered a gold nugget weighing a few grams in a California river. This news, which spread rapidly, would give rise to the famous gold rushes.
From 1849, more than 80,000 gold diggers from all over the world came to try their luck. An exceptional period in world history, the gold rush had a considerable economic impact. This event testifies, even today, to a strong and particular attachment between the US and the precious yellow metal.
Gold, a fiduciary currency until 1971
For a long time, gold has been a local currency, but also the standard, the standard, in monetary transactions on an international scale. As fiat currency, physical gold represented the primary value of ancient economies. This is the case for the USA from 1792 to 1971.
The Min Act of 1792
Sixteen years after the declaration of independence of the United States of America in 1776, Congress passed the Mint Act on April 2, 1792. The adoption of this law in Philadelphia was intended to establish the country's first currency.
As of that date, only the federal government has the power to mint and issue the nationwide currency, the US dollar. The production and circulation of these coins are ensured by the United States Mint. This agency also acts as a central bank controlling currency regulation across the United States.
Congress then makes the dollar the basic monetary unit and adopts the bimetallic standard. In other words, this means that both gold and silver are legal means of payment in the United States. The law defined the value of each metal relative to the other.
At the time, the ratio was 1 to 15. It was therefore possible to invest in gold, at the selling price of 1 kilo of gold against 15 kilos of silver. It was also quite possible to exchange a gold bar for the equivalent in gold coins.
The gold standard and the Bretton Woods agreements
Just after this bimetallic monetary system, new needs appear with the expansion of international trade. The USA, like many other countries, must find a system to exchange the national currency in currency. This is the birth of the gold standard.
The monetary unit is defined according to a fixed weight in gold. The currency is then freely convertible into gold. Currency prices therefore experience little volatility. The gold standard dominated the foreign exchange market throughout the 19th century.
But the 20th century sounded the death knell for this system. Indeed, the Second World War was very expensive for all the countries involved. A balance then needs to be struck with a new global monetary policy.
The Bretton Woods agreements in 1944 established the dollar as the only currency convertible into gold. This is the appearance of the gold-exchange standard or the dollar standard. The USA has an important weight in the negotiations, because it then holds 2/3 of the gold reserves in the world.
The USA was also, at the time, the world's leading economic and industrial power. This agreement makes the US dollar the world reference currency. The other currencies will therefore be fixed according to the dollar.
1971: the USA puts an end to Bretton Woods
Between 1944 and 1971, the United States suffered several budget deficits. The price of an ounce of gold had been fixed at 35 dollars. As all currencies were defined in dollars, the United States had a commitment to control the stability of its currency and not see its budget slip.
Faced with these successive deficits, international dollar holdings are rapidly exceeding the value of the stock of gold that the United States holds in its federal reserve.
On August 15, 1971, Richard Nixon then decided to break the Bretton Woods agreements and to stop the convertibility of the dollar into gold. This announcement opens the era of the free variation of currencies between them.
The Price of Gold and US Dollar Inflation
Despite the end of the gold standard system, gold is still as attractive as ever from an investor perspective. During periods of inflation and rising prices, gold tends to retain its value, making it the ultimate safe haven.
a tangible asset On the scale of the world economy, gold is an asset whose value is not decided according to supply and demand. The precious metal acts unlike currencies, stocks, bonds or any other banking product. Gold is a precious, rare and tangible resource, acclaimed in particular for the protection it offers against inflation. When the value of the currency declines, investors flock to assets that do not lose value. Buying gold is then the first investment. There is therefore a correlation between the demand for gold which increases during inflation and decreases during deflation. Gold and the dollar: a countercyclical relationship The observation of the price of gold linked to inflation is also noticeable with the dollar and more generally with the status of the economy.
Indeed, its value is linked to changes in US interest rates. When the price of the dollar goes up, the value of gold goes down. This leverage effect is explained by the fact that the raw materials are valued in US dollars. If there is a depreciation of the dollar, gold becomes cheaper to acquire for investors in other countries. This inverse or countercyclical relationship also manifests itself during economic uncertainties. In this specific case, the value of gold tends to rise due to its status as a safe haven. It is during periods of economic crisis that the price of gold reaches record highs and becomes a guarantee fund for many governments. The quantities of gold held by central banks are proof of this. According to the International Monetary Fund (IMF), the world reserve is estimated at 34,000 tons of pure gold. The USA holds the first position with more than 8,000 tonnes. The Banque de France, meanwhile, has 2,400 tonnes of gold. A stock that currently ranks her 4th in the world.