The Story of The Gold Price

And the Gold Standard

An understanding of the historic role of gold as a currency, or its close linkage with currency, is necessary to appreciate the central role gold has played in economics and trade, internationally and in Australia.

It is not generally known that until some 50 years ago, the gold price was essentially fixed. The link between the gold price and currency was finally severed in August 1971 and the gold price was then free to float, that is, it was no longer regulated. In December 1983, the Australian dollar was also free-floated and its exchange rate with other currencies was no longer fixed or managed.

Today, the local gold price is determined on an immediate basis, by using the US dollar gold price and the Australian dollar:US dollar exchange rate. This can be computed in real time but the daily price is determined using the London pm fix US dollar gold price and the Reserve Bank of Australia daily exchange rate.
In Australia, the exchange rate effect between the local Australian currency and initially Sterling, then later the US dollar, has had a significant bearing on the fortunes and the perceptions of the local gold industry.

In the earlier 1900s, the decline in the value of the Australian pound versus Sterling helped the local industry survive. Later, the US dollar replaced Sterling as the main international currency and it is the difference in value between the US dollar and the Australian dollar that is now important. Since the Third or Modern Gold Boom, which began in Australia in 1982, the considerable variation in the relative value of the two currencies has often benefitted the Australian industry substantially.

While the gold price expressed in US dollars is the internationally accepted measure, it is the Australian dollar price that is most important locally. The majority of costs are in Australian dollars, so it is the difference between the costs and the gold price expressed in Australian dollars that determines the profit margin, for locally listed gold producers who report their results in Australian dollars. The situation is somewhat different for those reporting in other currencies or that have sizeable liabilities in other currencies.

Since August 1971, the gold price has fluctuated considerably but has trended up over the last 50 years to peak at a record price in August 2020 before trending lower. In US dollar terms, the rise was well over 50-fold in 50 years, from US$35 per ounce to US$2,067 per ounce. In Australian dollar terms the rise has been even greater, from some A$31 per ounce to a peak of A$2,868 per ounce. The trend has obviously been upwards but volatile and such volatility usually reflects uncertainty – in economies and financial markets and in social and political unrest and upheaval, around the world.

The Gold Standard

The economic wealth and standing of a country and the value of its currency were closely linked to gold in the 1800s and much of the 1900s. Great Britain’s dominance of world trade in the 1800s and the rise of the United States in the 1900s were supported by their access to gold. The massive increases in gold production from large new goldfields, especially in North America, Australia and South Africa were fundamental to a world monetary system underpinned by gold. Control of those goldfields was in the hands of a powerful Great Britain and an “emerging power”, the United States.

The value in Great Britain of 1 oz of pure gold at £4/4/11½ dates from Sir Isaac Newton’s time. In 1696 he was appointed Warden, and later became Master, of the Royal Mint. It should be noted that this value was for pure, or 24 carat gold (coinage was 22 carat gold.)
At the start of the 1900s the Sterling gold price remained unchanged and the US dollar price was fixed at US$20.67 per oz. This tied the Sterling pound and the US dollar together, at an exchange rate such that Sterling £1 equalled US$4.86.

A gold standard had been introduced in Great Britain in 1821 and adopted by many other countries by the later 1800s. This was a “true” gold standard – a monetary system in which the standard unit of currency was either a fixed amount of gold or was valued as a fixed amount of gold and in which paper currency was freely convertible into gold. The international gold standard meant that each participating country’s currency was expressed as a fixed amount of gold and therefore exchange rates between such countries were effectively fixed. Such a “true” international gold standard lasted from the 1870s until the start of the First World War. Under the “true” gold standard, currency and gold were readily interchangeable.

A form of gold standard, a gold bullion standard, was reintroduced internationally in the mid-1920s. Variations on the gold bullion standard were agreed from time to time thereafter but a true gold standard never returned.

In January 1934, US President Franklin Roosevelt raised the price of gold to US$35 per ounce and the Sterling price rose accordingly to £7/3/10 per ounce. The US$35 per ounce price prevailed officially until August 1971. The formal link between currency and gold was partially broken when the “two tier system” was introduced in May 1968 and completely broken when gold was freely floated in August 1971.