Gold’s amazing 2008 comeback stumbled Aug. 15 as the precious metal dropped below $800 an ounce for the first time this year, completing a slide that had begun five months earlier on March 17 when the London daily fix topped out at $1,023.50, silver weighed in at $20.92, and platinum was at exactly $2,000 an ounce.
The London Fix, since 1919, has governed gold transactions. Current members of the Fix are: The Bank of Nova Scotia - Scotia Mocatta; HSBC (formerly Hong Kong Shanghai Bank Corp.); Deutsche Bank AG London; Societe Generale Corporate & Investment Banking, and Barclays Capital.
The procedure followed by the five member firms is designed to fix a price for settling contracts between members of the London bullion market. The fix takes place twice a day, and is now done by telephone at 10:30 a.m. and 3 p.m. local (London) Greenwich mean time.
First fix took place on Sept. 12, 1919, amongst the five principal gold bullion traders and refiners of the day: N.M. Rothschild & Sons, Mocatta & Goldsmid, Pixley & Abell, Samuel Montagu & Co. and Sharps Wilkins. The gold price then was £4 18s 9p, (4 pounds, 18 shillings and 9 pence (GBP 4.9375) per troy ounce or about $24 an ounce. The official price was still $23.67 an ounce.
Today, gold prices are fixed in United States dollars, pound sterling and European euros. Originally, the offices of N.M. Rothschild & Sons in St. Swithin’s Lane were used for a table side meeting of five competitors; but since May 5, 2004, it has been done by phone. In April, 2004, Rothschild withdrew from gold trading and Barclays Bank took its place.
At the Rothschild board room, participants could raise a small Union flag on their desk to pause proceedings. With the telephone fixing system, participants can sill register a pause by saying the word “flag.” A rotating chairman ends the meeting with the phrase “There are no flags, and we’re fixed”.
Gold’s price history probably should be divided into three parts. First is the period prior to 1933, when President Franklin Roosevelt effectively nationalized gold and prohibited private gold ownership.
Second is the period from 1934 to Dec. 31, 1974, when U.S citizens lost the right to own gold, except for “rare and unusual” gold coins – numismatic items.
Third period in this is from Jan. 1, 1975, to the present when Americans fully participated in the gold market. A fourth period may be in the future when Chinese are able to fully participate in a developed gold market, opening up 300 million middle-class purchasers to this exciting field.
Gold’s price history has been remarkably stable over the past century and a half. The accompanying chart shows this stability from 1837 until 1933, with various spikes characteristic of a free market, but aware nonetheless of a giant overhang of bullion held by the world’s central banks. The U.S. stockpile is at Fort Knox and the Federal Reserve Bank vaults in lower Manhattan, not far from the former World Trade Center site.
The U.S. gold reserve is a tough cookie to measure, in part because it does not value the gold at market, but instead at the “official” price set by Congress at $42.22 in 1973. (That changed the value from $38 an ounce and effectively devalued the dollar since that was the unit the most banks used to define net worth.)
Most gold is in long-term storage – over 258 million ounces – a huge overhang that has led some to suspect price manipulation by the Treasury (which values this at $10.9 billion or about $193 billion at current prices). They deny this, going so far as to say on a government Web site that “We would like to emphasize that the Treasury Department does not seek to manipulate the price of gold or any other metal by intervening in or otherwise interfering with the market.”
America’s history with gold is an uneven one. Gold at the nation’s beginnings did not have its role of today as an asset of last resort, but rather it was a primary asset of wealth. When the United States was founded as a nation, the Constitution was leery of the colonial experience with currency “not worth a Continental.”
Banned was issuance of “money” that was not gold and silver. That didn’t mean copper coinage couldn’t be issued for change, and indeed, just three years after the Constitution was adopted, the Mint Act of 1792 called for gold, silver and copper coinage.
Gold and silver metal, bullion, foreign coin or plate could be deposited with the Mint where, for a small service or convenience fee (half of 1 percent), the Mint would smelt it down and coin it into national money using prescribed weights and sizes. The value of gold and silver per ounce was determined, the volume of metal legislated, and coinage was ready as soon as the Mint director and chief coiner filed their bonds – which took two years.
Each gold coin had its full weight and measure, that is, a gold eagle had just about $10 worth of gold in it. Silver dollars were similarly regulated, as were subsidiary coinage, but the historic problem is that precious metal prices are generally unstable absent a market-maker who guarantees a fixed price.
The result was that American silver coinage was worth more melted than coined. Deposits all but ceased, coinage flowed abroad to settle debts or for smelting, and by the turn of the 19th century, silver dollar coinage was entirely suspended – not to be restarted until the mid-1830s. Lacking a domestic source of gold until deposits were discovered decades later in the Carolinas and Georgia, there wasn’t much gold coinage either.
Through the early 1800s there was a real need for coinage, and Congress tried to rectify the problem by regulating the value of foreign coins that circulated domestically. For example, the act of April 29, 1816, regulated the legal tender value of foreign coins of Britain and Portugal and called for their assay.
Another law, signed March 3, 1819, continued in force legal tender values of foreign coins. Two years later, the act of March 3, 1821, regulated 5 franc and crown legal tender values, which was renewed on March 3, 1823.
But Congress had a hard time getting it right; the bullion market was constantly changing. As a result, on June 28, 1834, the legal tender value of foreign silver coins of Mexico, Peru, “Chili” and Central America were fixed; the same day, another law reduced weight of foreign gold coins per dollar, thus revaluing the U.S. dollar in the process.
By 1837, it was necessary to do it again, but this time Congress got it right, setting the value of gold at $20.67 an ounce – a rate that would hold for nearly a century and provide substantial stability. (Charting this using authoritative sources shows that there are slightly higher prices on average due to market movement.)
Through the California gold field discoveries, the Civil War, the expansion of America meeting its manifest destiny and to World War I and beyond, the $20.67 an ounce gold – the U.S. double eagle $20 gold piece contained $19.999 worth of gold – the price essentially held stable.
To be sure, there were spikes, such as when Jay Gould attempted to corner the gold market (1869), but that overall stability came at a price – the monetary system could not expand easily and the government had difficulty assisting the economy. Once, during the Civil War, the government literally ran out of money and had to print paper substitutes.
This innovation, by then-Treasury Secretary Salmon P. Chase, saved the Union – only to be declared unconstitutional after the emergency was over, by newly appointed Chief Justice of the Supreme Court Salmon P. Chase; yes, the same one.
Starting around 1867, silver discoveries in Nevada began to impact the marketplace and it became impossible for the government to allow unregulated quantities of metal to be converted into coin – cheap money, for instead of costing a dollar to mint a silver dollar, the cost with metal was more like 67 cents.
By the time that the Coinage Act of 1873 was passed, silver had moved to all-time lows and, aside from trade dollars which contained the heavier 412.5 grains but were not a legal tender– there was no right to coin silver by depositing metal. The Crime of ‘73 all but demonetized silver, an act made complete with the passage of the Gold Standard Act for 1900.
America’s golden era ceased with the Great Depression of 1929, when the U.S. sneezed and the world economy caught pneumonia. Gold reserves started an outflow, and it simply never stopped. By the time of the 1932 presidential election, the depression worsened and a political switch to the policies of Franklin Delano Roosevelt lay in the wings.
FDR took office March 4, 1933, and shortly thereafter, the New Deal required millions of dollars worth of gold coinage to be turned in by citizens who held them, acting on a government mandate and under a Presidential Proclamation requiring it.
Only rare and unusual gold coins were exempt, enough to allow coin collectors to maintain and keep a collection, assuming that they would be able to do that during the depths of economic despair of 1934.
March 1968, saw LBJ forced to renounce a second full term, and nearly simultaneously, set up a two-tiered market for gold based on the official price of $35 an ounce, and a free market price that was permitted to float somewhat higher.
The price of gold jumped, moving to heights of $43 an ounce, which caused a sensational ripple in the coin market, because double eagles traditionally traded at a price of about 48% above the spot price of gold. Overnight, they went from $48 a coin to $60 for uncs.
Gold coins were traded and available on a widespread basis, even British sovereigns of the modern era – but if any were made after 1960, they could not be legally imported into the United States without a permit from the Office of Domestic Gold and Silver Operations.
Dr. Leland Howard, an assistant director of the Mint, became head of the ODGSO, and his task was to protect the integrity of the Roosevelt seizure order, while simultaneously allowing rare and unusual coin to be imported.
Eventually, an arbitrary line in the sand was drawn with 1960 as the demarcation point. Before that, it was rare and unusual – even if it was a 1958 sovereign with 8.7 million pieces produced; afterwards, it was common, and not importable with a license – even if it was a 1962 sovereign with 3 million pieces manufactured.
The humor of this governmental regulation of the economy can be seen with thousands of words of government regulation that then resulted to try and explain what was rare and unusual; why, and how some items were prohibited, while others could be imported.
As gold faced the real market for the first time following 1968, it was inevitable that economic forces that traditionally had driven the price upward -- inflation, war, and economic fears– could, in the converse, drive its price down.
And so it did in the early days of 1970. By Jan. 16, Under Secretary of the Treasury Paul Volcker (later chairman of the Federal Reserve) announced that the new gold agreement signed with South Africa provided “no assured ‘floor price’ for gold speculators,” and with that, the metal dropped to its lowest price in London free trading in 16 years – below the official floor ($34.90).
In a letter to Rep. Henry Reuss, D-Wis., then chair of an international economic subcommittee, Volcker called the agreement with South Africa “consistent with a two-tiered system” of pricing gold.
A couple of years later, in an interview with me while serving as Numismatic News Washington Correspondent, Reuss would say that this marked the real beginning of the drive for private gold ownership – which did not take place until Dec. 31, 1974.
Gold’s importance to the overall numismatic market wasn’t overlooked in the 1970s, and later. Indeed, I often wrote of the parallel that seemed obvious between the way that the price of gold bullion moved, and the manner in which the coin market responded.
The events of January 1970 were at once liberating as well as thought provoking. In a totally free market, gold could rise or fall -- and without an official price or a floor, as Volcker put it, the metal price could go below an official government buy price.
Ironically, within 18 months, inflation would be ravaging the nation, and on Aug. 15, 1971, President Nixon would suspend the dollar’s convertibility into gold, slamming down the gold exchange window, institute wage and price controls, and set the stage for the dramatic rise of gold – and the numismatic market-- for decades to come.
Once again the dollar was devalued , raising the official price of gold to $38 an ounce. (Later it would go to its present official price of $42.22). But ironically, with or without an official price, the run on the metal proved the historic truism that gold was, and is, king of precious metals).
In 1973, gold regulations were eased slightly, to allow more gold coins minted between 1933 and 1961 to be admitted to the country as “rare” coins, however, a drive in Congress to reverse the action of four decades before failed when the House failed by a single vote to call for immediate ownership.
By early 1974, the President had gained the legal authority from Congress to allow private gold ownership at any time he felt it is in the best interests of the international economic situation of the United States.
Gold ownership finally came about in one of the most unusual unitings of interest of diverse political elements -- the conservative “gold bugs” and the liberal Democrats.
Succinctly, the Democrats had a foreign aid package that was in need of passage; the conservative Republican “gold bugs,” most of whom had voted against every foreign aid proposal that ever came before Congress saw a truly golden opportunity.
They added a clause to the foreign aid bill that would simultaneously legalize private gold ownership but also retroactively repeal all of the regulations and laws that impeded holding the precious metal.
The unusual political coalition held together, the foreign aid bill became law, and on Dec. 31, 1974, private gold ownership was again permissible for the first time in 40 years. Gold’s historic role once again moved to preeminence.
Gold’s price rose in the 1979-80 commodity surge to $800 an ounce, but then relented. Gold coin prices for common typical uncirculated pieces closely mirrored the bullion price, with a modest numismatic surcharge. Charting the coins over an extended period of time shows that they still make a valid investment as well as inflation hedge– better in fact than bullion.
In retrospect, the fight to regaining old ownership – and the governmental battle to prevent it – seems silly. Today, people buy gold, invest in it – and hold gold coins – without giving the metal a second thought. The international monetary system did not fall apart with private gold ownership, and neither did the American economy. What was ultimately shown is that those who held onto rare coins – rare gold coins – were richly rewarded.
Gold probably has a floor in this at $650, but will likely strengthen if formerly solid financial institutions find themselves in dissolution. This all has an effect on the coin market, but data suggests that a trading range of $750 to $975 in the short run is likely, with higher numbers coming up in the long term. This amazing asset has a history and longevity that simply won’t die.