Tuesday, March 8, 2011

Riding The Second Gold Bubble

No matter which gold price diagram you look, the price of gold seems to be going upwards. We are above old all time highs. Is it just a huge bubble or is the price justified?

The price of gold in dollar terms was pretty flat until 1934 when dollar was devalued against gold by 69%. In the previous year Franklin D. Roosevelt declared gold ownership illegal and U.S citizens were required to sell all their gold to Federal Reserve at the official exchange rate $20.67 an ounce. Gold ownership in USA was illegal until 1975.

After the Second World War, a system similar to a Gold Standard was established by the ”Bretton Woods Agreement”. Under this system, many countries fixed their exchange rates relative to the U.S. dollar and U.S. promised to fix the price of gold at approximately $35 per ounce. [Wikipedia]

The system broke down in 1971 when U.S. announced that dollars were no longer convertible to gold. This was the result of France converting its dollar reserves to gold (calling U.S. bluff), fiscal strain of federal government due to expenditures for the Vietnam War and persistent balance of payments deficits. [Wikipedia] After 1971 the price of gold soared due to the reasons stated before and due to high inflation.

The full article with charts of gold price and U.S Dollar purchase power over 110 years is published exclusively via Seeking Alpha.

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