no one cares about gold when life is good

Market vibes

September 29…) 

Charles De Gaulle, 1965

“Buying gold near $200,” one trader said, “isn't a hedge against anything except being wealthy” The New York Times, Jan. 26, 1975 

On Saturday November 18, 1967, the British government led by Prime Minister Harold Wilson devalued Pound Sterling by 14% from $2.80 to $2.40. The government tried to maintain the pound at its pegged rate, but continuous interventions and borrowing from the IMF was unsustainable.

Immediately, speculation the dollar would be next put upward pressure on the price of gold. In turn the London Gold Pool stabilized the statutory price of $35 per ounce by selling gold from their reserves which had fallen precipitously since the Pool’s inception in 1961. US gold reserves were nearly 800 million ounces in 1953 and they had fallen to 290 million by March of 1968. This decline in gold reserves was equally accute among the founding EEC members, The United Kingdom and Switzerland.  

On or about March 30, 1968, the Gold Pool collapsed, closed for several days and reopened with an indicative floating price of $37.70. Business resumed. The London gold fixing continued to facilitate trade between producers and consumers from 1961 to 1968, but volatility was obviously nil. When the gold pool reopened with a floating price the fixing added a second PM fix which became the daily benchmark for settlements. (sources UK.gov/the National Archive/ the Cambridge Press).

By May 1969 gold traded as high as $43.60, 17% higher in eleven months. Mining shares in South Africa and Canada were hot and the first equity gold funds began to take off. Among them American South African with the slogan, “ASA all the way!”

By August of 1971 redemption of dollars for gold was so intense that Nixon suspended convertibility. It was intended to be a temporary stop gap and the admistration was prepared to reopen convertibility if ramifications were severe, according to several credible sources. But the markets didn’t react and the golden link between politcal accountability and reality was summarily terminated.

Three years hence, on December 31, 1974, Ford repealed restrictions on public ownership of gold enacted by Roosevelt in 1933. The NY COMEX and Chicago Mercantile Exchange launched futures trading and on January 6, William Simon Secretary of the Treasury offered 2 million ounces of gold to anyone with certified credentials at the first of 2 Dutch auctions that year. However, the gold rush of ‘75 was a flop and chronicled nicely in the NY times: (What Happened to the Gold Rush of ‘75?). 

The chart below is instructive, illustrating gold’s delayed but predictable response.

After stabilizing from April through August 1975, gold prices declined sharply in September when the IMF agreed to sell 25 million ounces of gold and distribute (“restitute”) another 25 million ounces to member countries. The IMF still holds about 90 million once of gold. Mao Tse Tung died in September 1976. Asia stampeded into gold catching the western financial establishment heavily short.  

In the nine years following the collapse of the London gold pool, gold rallied 500% from1971 to 1974 and fell 50% in 20 months. From its low on September 9, 1976, gold rallied 800% in 3 years. My point in this brief review is not to predict what gold prices will do now but to review for the reader what they have done.  

The years 1980 to 2000 might easily be described as the golden age of American finance (next chart). I say golden because gold was silent. The Reagan Clinton economies delivered booming productivity and surging middleclass wealth. Greenspan, a devotee of Ayn Rand, ran the Fed so brilliantly he was affectionately called the Maestro. The world was at peace.  

Look what happened to gold at the turn of the 21st century (1999 Ashanti). Gold rallied 500% again. Episodic catastrophes littered the next decade; 911, war, the housing bubble, the fall of Lehman, the crash, student debt, oil at $100 for 5 years, etc. etc. and gold weighed in. 

From 2000 to 2016 Federal debt went from 5.5 trillion to 20 trillion. The US federal government became the largest employer in the world, more than India or China with a quarter of their populations. The federal debt has nearly doubled since covid and it’s accelerating up. Gold is positively correlated with Federal debt. Next chart.