I have had some interesting questions tossed my way about gold in recent weeks by a beginner. I don’t have all the answers, or even enough space here, but it sure got my mental wheels turning.
Collectors know a lot about gold, but what they know probably reflects what point in time they entered the hobby and have learned since then rather than any consistent effort on the hobby’s part to provide any systematic education.
To start off, gold was money for thousands of years, but the governments of the world have declared that it no longer is, though many central banks hold massive quantities of the precious metal as a carryover from the old days when gold backed the issuance of paper money.
In the United States until 1968, paper money had to be one-quarter backed by gold. Until 1971, countries that held U.S. dollars could present them to the Treasury and demand gold at the official price of $35 per ounce.
This redemption promise was revoked in a financial crisis Aug. 15, 1971.
It became illegal for Americans to own gold bullion in 1933 and this was the law of the land until 1974. During that period, collectors could own certain gold coins and this exemption got progressively more liberal as time went on.
The reason gold was called in was the Roosevelt administration had decided to fight the deflation of the Great Depression with inflation, which they intended to stoke with a dollar devaluation. When gold was recalled, it was redeemed at the then official price of $20.67 a troy ounce, a price that had been in effect since 1834, with a lapse 1861-1879.
An official price of $35 was established in early 1934, meaning the gold value of the dollar had been reduced by 59 percent. This was the last time the United States acted internally as if gold was an integral part of the financial system.
By the time the crisis of 1971 arrived, gold was considered more of an international sideshow by the government. It devalued the dollar in terms of gold in 1971 and again 1973, setting official prices of $38 and then $42.22, but these prices did nothing but become the short-hand method of expressing U.S. government gold holdings. This is done to this day. The 260 million troy ounces the federal government possesses is carried on the books for far less than the $740-an-ounce present value.
A free market in gold was allowed to develop in London and then elsewhere after 1971. Gold initially went through the roof, rising to nearly $200 an ounce by the end of 1974. It receded. The next peak was $850 in January of 1980. The most recent peak of just over $1,000 was in March of 2008.
During the periods leading up to those peak prices, it seemed as if gold was the be-all and end-all of the numismatic hobby. Those of us who have been around awhile know that gold bullion is not at the heart of the hobby, but it is a hard point to make in this year of screamingly bad financial headlines.
Collectors also know that gold may not officially be money any longer, but it still has monetary importance as a barometer of confidence in the buying power of paper money.