Part II: The Rise and Fall of the Gold Standard

Gold’s Journey in the Global Economy

Gold continued to remain one of the most valued items throughout the following centuries. By the 19th century, it was already playing a key role in international trade and monetary transactions. The dawn of the 20th century brought new economic thinking, including the idea of central banks issuing currency backed by gold. This meant that instead of carrying around gold or silver coins, citizens could trade with paper currency, which could be redeemed for gold.

In 1944, as World War II was nearing its end, 44 countries of the newly formed United Nations entered into what’s known as the “Bretton Woods Agreement.” This agreement directly tied the value of each country’s currency to its reserves.

Effectively, each country’s currency was linked to the US Dollar, which in turn was pegged to gold at $35 an ounce. This meant that foreign governments and central banks could exchange US dollars for gold, which helped establish the dollar as the world’s primary reserve currency and maintained stability in international financial relations.  It was the first time in history that so many nations agreed on a financial matter. Additionally, in most of these countries, citizens were not allowed to hold bullions and coins physically.

The End of the Gold Standard

The early 1970s marked a landmark moment when the US Central Bank (Federal Reserve) decided to break away from the “gold standard” by terminating the convertibility of the US Dollar to gold. This meant that the US would no longer exchange its currency for gold, and going forward, its currency would only be backed by trust in the US Government. In December 1974, the US Government allowed private citizens to store and trade gold after a period of almost 40 years. This change naturally sparked increased interest in this yellow metal, with many institutions and individuals looking to buy and store it again as an investment.

This move allowed gold to emerge as a new asset class. Investors and academics were drawn to understanding gold’s investment characteristics, leading to extensive research and analysis. By this time, the equities and fixed-income markets had already been established in the US and other parts of the world. The change in law added a new tool to the investment portfolio in the form of gold.

Multiple studies and academic research shown over time have established a few properties of this yellow metal as an investment.

Gold as a Diversifier and Safe Haven

Gold has demonstrated its ability to serve as a diversifier in investment portfolios. Its low correlation with traditional asset classes like stocks and bonds can help reduce overall portfolio risk. Additionally, it has often been considered a safe-haven asset, tending to appreciate during times of economic uncertainty or market turmoil. 

Conclusion

Gold’s enduring value and historical significance make it a unique and valuable component of a diversified investment portfolio. In the next article, let’s dive into gold as a modern investment, different ways you can incorporate it into your portfolio, and gold & its properties as a safe haven in a portfolio.

Check out other articles in this series below.

Part I: Gold – More than a Pretty Metal

Part III: Gold – Stability in Uncertain Times

Part IV:  Buying Gold After the 2024 Budget: Which Option is Best for You?

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