When the Bretton Woods system flourished in the immediate aftermath of World War Two, a nation’s currency could only maintain its value and prestige if the nation in question had adequate supplies of gold reserves.
The rise of the US as a dominant superpower in the post-World War Two era was bolstered by the Federal Reserve holding significant quantities of gold. Meanwhile, other countries were forced to devalue from time to time, if they found themselves short of this rare and valuable commodity.
Now the tables have truly turned. Bretton Woods is long gone, the US has significantly less gold than before, and successive attempts to inflate the economy out of recession have left it in a weakened state. It could be the end of the US dollar’s dominance, and the rise of a new gold standard.
The price of everything and the value of nothing
Since 1971, the US has taken the option of allowing the dollar to float freely as a fiat currency, as with many other currencies. The advantage of such an economic model is that, in the event of economic weakness, countries can devalue their currencies, making their exports cheaper and boosting demand in the long-run.
But devaluation is a sticking plaster and not a lasting solution to the economic problems faced by the US, the UK, Europe or even the world economy at large. The erosion of a nation’s currency puts savers at a disadvantage, especially when you consider how low interest rates are.
Assuming rates are low and inflation is constant, the incentive to save is lost, as people have no option but to spend their money or let inflation eat away at it. While the link between currencies and gold was ultimately severed in 1971, the gold price has responded by rising to reflect this erosion of value, ultimately serving as a safe haven to protect wealth for nimble investors.
While some may say that the gold standard has well and truly had its day, movements in the gold markets suggest that a dormant juggernaut is just waking up.
The gold market in context
To make sense of how gold is behaving, consider the way the markets have moved since 2000. Since the start of the new millennium, interest rates have fallen, inflation has persisted, take home pay and productivity have moved much slower than expected, and many assets look overcrowded.
Many were concerned that stocks and bonds had become overvalued, especially amid the Dot Com bubble in 2000 and the subprime bubble of 2007. Arguably, the rise in markets seen since 2009 has been ‘an everything bubble’. Shares and bonds have both risen in value, but as the recent lockdown suggests, scratch below the surface and there are deep-seated problems to face up to, which are highly supportive of a pick-up in gold prices. Bond yields have fallen so low that the British government is actually charged a negative rate of interest.
Gold has risen in pound sterling terms consistently since 2000, with a particularly strong showing since 2016, as Brexit uncertainty has come to the fore. Investing in gold would have cost you £700 per troy ounce in 2015, but if you sold now, you would be able to sell for as much as £1,400 per troy ounce, a remarkable return on your investment.
Where next for the gold price?
Now the gold price in US dollar terms is rising towards a near-record high. Central bankers and finance ministers across the world race to support growth. They do so, using low interest rates, high government spending and quantitative easing to flood the markets with pounds, dollars and Euros. The effect this could have on inflation is yet to be revealed.
The impact on gold is instantaneous, suggesting that the gold markets expect weaker currencies and eroded savings. Gold prices have jumped, and are moving in a clear parabolic price pattern, supportive of higher highs yet to come. This could be the precise moment to time an investment in gold, as price gains often continue for a lengthy period of time, once gold breaks out to new all-time highs.
For more information about how to buy gold as an investment, contact UK Bullion today. Please note that dispatch has now been resumed for bullion items, with delivery of new orders in three to four working days