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Shades of 1976!
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(June 26, 2013) Let’s be honest here – gold has lost more than 1/3 of its value from its peak of August 2011. For those of us who are heavily committed to the shiny yellow metal, there really hasn’t been much good news since two summers ago. Gloom dominates the physical gold market in the US. Bad-mouthing gold is the current national sport. Has it ever before been this bad? Yes, not so long ago, it was even worse.
Sometimes it’s best to step back, take the long view, and gain a little bit of historical perspective. Gold markets are no different from any other cyclical markets – history doesn’t repeat itself, but patterns emerge if you take a look.

The fact is that, in modern post-gold standard history, there has seldom been a plunge in gold prices like what’s happened over the past 22 months or so.

But one time, there was a much deeper drop. It happened when gold was first starting to make the news in this country - during the inflationary 1970s, when the United States stopped paying out gold for paper dollars.

In 1971, after nearly forty years during which gold was pegged internationally at $35 per ounce, the US Treasury closed its gold window, and foreign banks were no longer allowed to exchange their dollar holdings for gold, at $35 or any other price. This unprecedented move by our Treasury essentially ended the final vestige of the gold standard, and signaled the dawn of the virtual dollar that we spend today. Eight years later, in January of 1980, the dollar price of gold was, for a brief moment, over $800 per ounce.

But throughout this run in gold’s price during the 1970s, there were many stops and starts. No market ever goes straight up, and the psychology of any market can change for reasons that are not always obvious at the time. And therein lies the tale.

At the start of the 1970s, private gold bullion ownership was still outlawed in the US, as it had been since Franklin Roosevelt’s decree in 1933. But rampant inflation in the US dollar during the 1960s started to attract attention, and became a major topic of concern in the press and among the American public. Political pressure started to build for allowing private ownership of gold bullion in the US, and this movement culminated with Congress passing, and Gerald Ford signing, a law that restored US citizen’s right to own gold in any form. All restrictions on gold ownership in the US would end on December 31, 1974.

Gold prices in January of 1974 averaged about $129. But prices climbed steadily that year, in part due to anticipation of ‘new money’ that US citizens would bring to the gold market in January of 1975. At the end of 1974, when the free ownership of gold became the law in the US, gold traded at $174. As 1975 began, Americans began buying gold bars and Krugerrands (Eagles, Maple Leafs, and Pandas hadn’t even been dreamed of yet). Gold prices climbed for the first few wekks, and reached a new high of $184 per ounce on Valentine’s Day.

But maybe the gold market had over-anticipated US investor demand for gold, as prices began to fall. Unfortunately, they fell just when Americans were finally able to buy gold bullion legally. In about eighteen months, the yellow metal lost some 44% of its value, bottoming out on August 25th, 1976, at $103.50.

With gold barely above $100 in price, gold became a widely-reviled investment, the punch line for hundreds of jokes. ‘Everybody’ came to the understanding that gold was a ‘barbarous relic,’ and a dangerous place to put your money.

Sounds a little bit like today, doesn’t it? A lot of people rushed into gold as the price went up, and a lot of people felt burned when it came back down again. It’s now gotten so bad that gold is a punch line again – for Jay Leno today, as it was for Johnny Carson in 1976.

After that price-whacking back in the mid-1970s, things naturally looked pretty gloomy for gold’s prospects. Many new gold-buyers ‘took their licks,’ sold their gold, and never bought again.

There’s no moral to be drawn from this story, and certainly no investment tips. But there is an old adage in the world of trading:

Markets tend to behave in ways that inflict pain on the maximum number of participants possible.

And the rest of the story? Right after that Bicentennial summer melt-down in gold prices, the yellow metal started to came back to life. In the next three and a half years, its price increased eight-fold, topping out in January 1980 around $850. Fortunes were made, but only by those who believed that gold is always the ultimate hedge against the dollar, and held on to their positions (or acquired new ones), during a time when gold’s price and reputation had become somewhat, should we say, tarnished.

 

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