Gold Prices and the U.S. Economy

Secrets of Today's Gold Prices

Gold prices reveal the true state of U.S. economic health. When today's gold prices are high, that signals the economy is not healthy. That's because investors buy gold as protection from either an economic crisis or inflation. Low gold prices mean the economy is healthy. That's because investors have many other more profitable investments like stocksbonds, or real estate. For more, see Why Invest in Gold?

Much more than the laws of demand and supply affect gold prices. That's because the amount of gold stockpiled is 60 times greater than the amount mined each year. That means upticks and slowdowns in mining activity aren't enough to affect supply. Also, 26 percent of supply is from recycled gold. When prices rise, so does the amount recycled. ​Only 10 percent of the gold supply go toward industry, mainly in electrical devices. The rest is used for jewelry, coin collectors, and central banks. (Source: "Don't Expect Peak Gold Prospects to Mean New Price Heights," The Wall Street Journal, June 5, 2015.)

Today's gold prices reflect the beliefs of commodities traders. If they think the economy is doing poorly, then they will buy more gold. If they think the economy is doing well, they will buy less gold. That's why gold prices reveal what savvy investors know about economic health. Here are examples of how that works. 

June 2, 2016 - Gold Rose $100 in Six Hours

Gold is bought as a hedge against inflation. Photo: George Peters/Getty Images

In June 2016, gold prices surged $100 an ounce in six hours. Investors panicked when Great Britain voted to leave the European Union. Prices rose from $1,254.96 at 4 pm on June 23, the evening of the Brexit vote, to $1,347.12 at midnight. That's because investors bought gold as a hedge against a declining euro and British pound. (Source: "Gold Surges Following Brexit Decision," The Wall Street Journal, June 2, 2016.)

Prices had fallen to $1,061 by the end of 2015. That's because the dollar had strengthened 25 percent since 2014. It looked like they were headed back to their historical price below $1,000 an ounce. For more, see Gold Price History.

In 2016, the stock market entered a stock market correction. As the Dow Jones Averages fell, gold prices rose.

September 2011 - Gold Hits All-Time High of $1,895 an Ounce

When gold hit $1,895, people said it would reach $2,000. They were wrong.

On September 5, 2011, gold reached its record of $1,895 an ounce.  A weak jobs report, the ongoing eurozone debt crisis, and lingering uncertainty around the U.S. debt ceiling crisis caused this. It had risen from $1,000 an ounce in 2009 to almost double that amount two and a half years later.

In July, investors were worried that Congress wouldn't raise the debt ceiling in time. Without the ability to issue new debt, the Federal government might have defaulted on its debt

In May, gold, silver, copper and oil prices plummeted. Successful commodities traders like George Soros had reduced their holdings. Silver was the first to go, falling 7.9 percent, its largest one-day drop in 30 years, to $39.38 an ounce. It had hit a 31-year high of $48.58 an ounce just one week earlier. Gold plummeted to $1,514.90 an ounce, after reaching an all-time high of $1,556.70 only two days earlier. Oil fell $1.81, to $109.24 a barrel, a two-week low. Copper fell to $4.12 a pound, a seven-week low.

In April, Federal Reserve Chairman Ben Bernanke's first press conference ever sent gold prices soaring. The Fed announced it would end its two-year program of quantitative easing, called QE2, in June. The Fed had bought $600 billion in U.S. Treasurys to keep long-term interest rates low. This announcement sent gold prices soaring to a new record of $1,520.29 an ounce on April 4, 2011. Gold investors were about inflation. Bernanke said the high oil prices that pushing up prices were temporary. Investors also thought the Fed should have announced it would raise the fed funds rate in 2011. 

In September gold spot bullion prices surged to a new record, $1,274.75 an ounce. Commodities guru George Soros announced that gold was the "ultimate bubble" and was no longer a safe investment. Research by metals consultant GFMS predicted that gold would skyrocket to $1,300 an ounce. Who was right? Both of them.

In June 2010, investors and central banks diversified out of euros, dollars, and other investments and into gold. Uncertainty about the eurozone debt crisis and the growing debt in the United States created volatility in the currency markets. Gold is always seen as a safe haven during times of uncertainty. Many people wondered if that was a good time to buy gold. In retrospect, it seems like it. Buying gold at that time would have resulted in a 53 percent return on your investment 15 months later. That's why timing the market always seems like a good idea, in retrospect.

Gold continued its historic rise, hitting another record of $1,081 an ounce in November 2009. This time, India's purchase of 200 metric tons of the precious metal from the International Monetary Fund buoyed investors. Gold bugs thought that this would be the beginning of central banks around the world adding to their gold reserves. At the time, there were concerns about the value of the U.S. dollar, and many thought the banks would sell their dollars and buy gold.

In September 2009, gold was trading near its all-time high of $1,032. As the dollar declined, many readers wondered whether it was a good time to buy gold. It sure was, if you had a crystal ball and could see into the future. At the time, the world was coming out of the 2008 financial crisis. Many thought economic growth would bounce back like it did following any other recession. Instead, a high foreclosure rate in the United States and growing sovereign debt concerns in Europe kept investors on edge.

In February 2009, gold reached $1,000 an ounce for the first time ever. Many investors thought this meant gold was a good investment. But, most financial planners will tell you that you should have no more than 10 percent of your assets in gold. We now know that anyone who bought at that time would have seen their investments rise 80 percent over the next two and a half years. That's because there was still so much uncertainty. In fact, the recession wouldn't end until latter part of 2009.

Gold Prices Tripled in 1973

Soviet leader Leonid Brezhnev signs an agreement with President Richard Nixon June 20, 1973 at Camp David, MD to prevent nuclear war with the US. Photo by Dirck Halstead/Liaison/Getty Images

One of the most important days in gold price history was President Nixon detached the U.S. dollar from the gold standard in 1976. Gold prices skyrocketed from $42 to $120 an ounce. 

In 1971, Nixon told the nation's central bank to stop redeeming the dollar for its value in gold. Foreign central banks could no longer exchange their dollars for U.S. gold. Nixon wanted to make the value of the dollar weaker compared to gold. He thought that would end the inflation caused by his wage-price controls. By 1976, Nixon abandoned the gold standard completely. Gold quickly shot up to $120 per ounce.

How Gold Prices Helped Cause the Great Depression

President Franklin D. Roosevelt. Photo: Getty Images

The price of gold went from $20.67 an ounce in 1929 to $35 an ounce in 1934. The Federal Reserve was trying to maintain the gold standard. That helped cause The Great Depression.

"Thar's Gold in Them Thar Hills"

The California gold rush made it possible for the United States to establish a gold standard. Photo: Vetta/Getty Images

When gold was found at Sutter's Ranch in 1848, it inspired the Gold Rush to California and the unification of western America. In 1861,​​ U.S. Treasury Secretary Salmon Chase printed the first U.S. paper currency backed by gold. That was the beginning of the gold standard. For more, see The History of Gold.