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Instant bling for a bad economy

When markets are bad, buy gold – but the classic bit of money-making wisdom only applies to times when the US market is in crisis. We look at the price of gold over time to see where the patterns emerge and highlight the events that pushed the price off the chart.

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By Daniela Scharffenberg & Jan Schwochow & Vanessa Gonschorek
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A shining asset in dark financial times

Gold enriches investment portfolios and can prop up the economy when the value of the US dollar takes a dive. However, this drives gold prices to new peaks. On September 5, 2011, gold reached the record price of $1,896.50 per troy ounce (31 grams) on the London Fix Price.

Gilded roller coaster

Until 1971, gold was relatively stable. The 1944 Bretton-Woods Agreement, put in place to regulate the international monetary system, tied the value of gold to that of the US dollar, ensuring that the US could not create money that was not exchangable for an equally valued supply of gold reserves. All currencies were pegged to the dollar, which was pegged to the price of gold, or the »gold standard«.

Gold hits the free market

By 1971, the Bretton Woods System could not withstand increased American spending and its overvaluation of the dollar. As a result, President Richard Nixon announced a temporary break from trading the dollar against gold. By 1973, values of major currencies traded in relation to each other and the temporary break was irreversible. Gold, now a free agent, went from trading for $35 per ounce to $120.

Inflation drives gold prices higher

Rapid inflation of the US dollar often leads to a »gold bubble« when the price of gold temporarily spikes. 1980 and 2008 provide the most dramatic examples, but other financial events in the United States follow a similar pattern.

Gold and US GDP in an unstable relationship

Despite the 1971 decision to unlink gold with US dollar value, the association between the two still drives investors. Financial crises in the United States tend to move the demand for gold, and therefore the price. This reflexive relationship is not so true of crises that originate elsewhere, when the US dollar functions as a stable reserve currency.

Driving the price of gold

A contracting economy effects the price of the dollar on the international market, driving the value of the currency down as investment decreases. This pattern played out dramatically in the financial cycle surrounding the 2008-9 recession.

On the precipice of disaster

Despite economic expansion in the early 2000s, the value of the dollar began to decline after 9/11. In the years before the housing crisis and recession, GDP growth was slowly backing off, too. Interest in gold had been rapidly rising through the decade, and continued the trend as investors hoped to maintain – and grow – their investments despite the trading value of the dollar. Between 2002 and 2006, the price of gold nearly doubled, from $309.73 to $603.46.

Crisis mode

With the collapse of Lehman Brothers and the subsequent recession in 2008 and 2009, gold prices exploded while the dollar plummeted. The price of gold doubled again, from $603.46 in 2006 to $1224.53 by 2010.

Bailout

Despite a massive bailout for US banks in 2010, the European debt crisis had just begun to unfold. The dollar’s value was still wildly uncertain, the euro provided no credible investment alternative, and gold continued to rise.

Stabilization

The value of gold hit its peak in 2011 and remained in a »golden bubble« of speculation through 2012, when its average price was $1668.98. By 2016, the average price returned to, $1250.74 around the same as it was at the heart of the recession.

In times of crisis, gold responds

Although the gold price tends to rise sharply before, during and after a crisis, that is often followed by a post-bubble drop. But if the 50 years since the end of the gold standard are any indication, its lustre is far from burning out.

Credits

Design: Jan Schwochow, Vanessa Gonschorek, Daniela Scharffenberg
Research: Jan Schwochow, Sabine Devins, Juliane Grebin
Text: Sabine Devins, Hilary Bown, Emily Manthei

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