A number of factors can influence the demand for gold and other precious metals and their price, according to Kevin DeMeritt, founder and chairman of Lear Capital.
The impact from global conflicts is one consideration; domestic economic conditions can also play a role.
While the U.S. government doesn’t directly determine some aspects of the economy, such as the jobs market, the impact of policymakers’ decisions has, at times, had a clear effect on it — as well as on the price of precious metals such as gold.
Roosevelt’s Gold Reserve Act of 1934
Decades ago, the U.S. operated on the gold standard. The Federal Reserve was required to hold gold that equated to 40% of the value of the U.S. dollars that were issued and to be able to convert dollars into gold at a fixed price of $20.67 per ounce.
However, as the interest in gold grew domestically and abroad, due in part to concerns about the U.S. dollar becoming devalued, the Federal Reserve’s supply decreased, eventually leading to the Federal Reserve Bank of New York no longer being able to convert currency to physical gold in March 1933.
Former U.S. President Franklin D. Roosevelt subsequently declared a national bank holiday, and enacted policies that restricted the private use of gold.
The Gold Reserve Act of 1934, signed on Jan. 30, 1934, transferred the ownership of all monetary gold — encompassing all coins and bullion individuals and institutions held — to the U.S. Treasury.
Americans were required to exchange gold items they owned that had a value of more than $100 for paper currency at a rate of $35 per ounce of gold, which reduced the gold value of the dollar to 59% of the $20.67 value that had been established by the Gold Standard Act of 1900.
The act also prohibited the Treasury and financial institutions from redeeming dollars for gold; established a $2 billion stabilization fund that could be used to buy or sell gold, foreign currencies, financial securities, and other financial instruments to help control the dollar’s value; and authorized the president to establish the gold value of the dollar by proclamation.
The act’s provisions did not apply to gold mined after its passage, and gold could still be purchased and sold internationally outside of the U.S. — which the Fed says set the stage for the modern gold market.
Bretton Woods and Beyond
After World War II, more than 40 countries agreed to adopt a collective international monetary approach, the Bretton Woods system, which fixed the U.S. dollar to gold at an exchange rate of $35 per ounce. Fixed (but adjustable) exchange rates for other nations’ currencies were pegged to the dollar.
By the 1960s, though, it became clear that the global supply of gold wasn’t enough to meet the world’s demand for reserves, which made pegging exchange rates’ use challenging, according to the Federal Reserve.
The U.S. had been operating under a payment deficit balance, and when the amount of outstanding dollar claims began to outpace its gold reserves, concerns that the dollar might be devalued arose.
Amid rising inflation, investors had begun transferring funds from dollars to foreign currencies and central banks were converting U.S. dollars into gold; in response, then-President Richard Nixon stopped allowing foreign banks to exchange dollars for U.S. Treasury gold in August 1971, and a number of foreign currencies began to appreciate against the dollar, prompting fear that international monetary relations would break down.
In December 1971, representatives from various nations gathered at the Smithsonian Institution in Washington, D.C., to determine a solution for the international fixed exchange rate system issues, which resulted in the establishment of the Smithsonian Agreement.
The U.S. agreed to devalue the dollar against gold by roughly 8.5%, and some countries said they’d revalue their currencies relative to the dollar, which resulted in a roughly 10.7% average devaluation of the dollar against the other currencies.
However, that arrangement wasn’t permanent, due to speculators driving a number of European currencies to the top of their exchange-rate ranges. The central banks amassed significant amounts of unwanted dollars, heightening inflationary pressure, and countries such as Germany and Japan increased the restraints they’d placed on financial exchanges.
In mid-1972, the price of gold had risen to approximately $60 an ounce; by 1973, it had climbed to $90 per ounce. The Bretton Woods system, according to Federal Reserve records, finally gave way that year, following speculation against the dollar that occurred after the U.S. devalued it by an additional 10%.
The U.S. now operates on a fiat money system. While gold can’t be created and only exists in finite amounts — which imbues it with an inherent value — the government can print essentially any amount of currency it would like, Kevin DeMeritt says.
“[With] every dollar you print, the money that’s already out there becomes worth less; that’s what happens over time to paper currency,” the Lear Capital founder says. “If you add an increase in demand onto that physical supply that’s fairly limited, usually what you’re going to find is prices go up; it’s economics 101. [So] paper money is probably going to continue to fall, and the price of gold is probably going to continue to increase.”
Gold Today
As CBS News noted in a recent article, policy changes the Federal Reserve makes can impact a number of elements, including the U.S. dollar and assets like gold.
When the Fed’s Federal Open Market Committee raises rates, as it has in recent years, gold’s price can also increase. In 1980, for example, when interest rates reached an unprecedented level of more than 15%, gold’s price shot up to $850 per ounce, a new high point at the time, according to Lear Capital.
As Lear Capital price charts show, gold fairly consistently increased in value after the Fed raised the target range for the federal funds rate to 5.25% to 5.5% in July 2023 — the level it remained at for more than a year, until the Fed announced on Sept. 18 of this year that it had decided to reduce the target range for the federal funds rate by 1/2 percentage point, lowering it to 4.75% to 5%.
This year, gold has hit a number of new high price points — most recently reaching $2,685.61 on Sept. 26, according to USA Today.
Lower interest rates don’t necessarily have a negative effect on gold prices, however.
Because lower rates can equate to lesser yields on assets such as U.S. Treasurys, those items may be less attractive to investors when rates decline. That could help boost gold’s appeal because it is not an interest-bearing asset, according to CNN Business.
As a result, if the Fed enacts further reductions to the target range for the federal funds rate in the remaining months of 2024 or next year, investors’ appetite for gold may continue to rise.
Central banks, for instance, have remained interested in buying it, Kevin DeMeritt says which, given how they tend to retain gold, could further constrain availability and help heighten demand.
“It makes sense,” Kevin DeMeritt says. “They get to hold gold, and that’s going to offset some of the inflation pressure on paper debt they hold. [Central banks] hold that metal for 10, 15, 20 years at a time; that metal is gone [from the market] — and you’re not talking about small amounts here.”
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