Technical Indicators - Gold History

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RECENT HISTORY OF U.S. GOLD TRADING (Note: This was written in July of 2000)

Gold of course has many centuries of trading, but the following begins in the 1970's in the United States which has more relevance to investors now.

In the early 1970's, the U.S. government withdrew its restrictions and price freeze of $35 an ounce. Subsequently in 1975, futures contracts began trading on the New York Commodity Exchange (Comex) and it eventually became the principal world market for trading gold contracts.

At the same time, in the 1970's, the U.S. underwent severe changes, presidential resignation and government uncertainty and economic instability. The value of the U.S. dollar was severely weakened - one market after another soared - people were startled regularly in their super markets to see first sugar soaring from 19 cents a pound to well over $1 - then coffee tripled in price - gasoline prices soared as gas became hard to get and lines at the gas pump became common.

This climate had an affect on the gold price as well as other commodities. At first the price crept up slowly, pausing for a while in the range of $100 to $150, then trading as high as $200, but mostly trading between $100 and $200 for a five year period until 1979.

1979 was a significant year in the U.S. Interest rates began soaring, the prime lending rate reaching 21% and the 30 year bond reached 15%. Gold, Silver, Oil and especially the Swiss Franc soared as people panicked to get their money out of the U.S. Dollar. It got so bad that Swiss Banks put a tax on U.S. deposits to discourage the decline of the dollar. In three months time the gold price went to $850 and silver reached about $50. Hard to imagine now, but it happened.

Things began changing with a new government in 1981 and gold (and other commodities and interest rates) declined, trading between $300 and $500. Many still remained nervous for a while and took most of the decade to get most things back to normal. Interest rates and other commodities went back to their pre-panic levels.

However, there lingered some demand for gold by investors because they had just seen the price soar and since gold could be bought in easily stored coins, it was an attractive investment as well as an object of speculation. However, this demand eventually all but disappeared because very few people made money. The stock market began to go up instead and became a much more attractive investment. Thus a big source of demand for gold was eliminated.

Gold then began trending lower, twice breaking just below $300. A lot of this of course was due to gold mining interests, particularly in South Africa, as they tried to keep interest in gold alive. Unfortunately, it was hard to do because the demand wasn't there as before. Eventually gold broke down, hitting the lowest price in 20 years last year when it hit $255. Since then it came up now and again, but is back to its pre-panic levels.

Those levels were between $100 and $200 dollars - even then many thought those prices exorbitant since they were used to seeing $35 gold most of their lives before the panic. It wasn't until after1979 when the panic began to peak, that most people became interested.

Perhaps if there was a big industrial use for it, that might be a source of demand, but in the U.S., that demand is very limited and the biggest demand is for jewelry which is about two thirds of the demand (probably bigger now that investment demand is a reduced part of the equation).

Of course with weakening stock markets, world wide, even the demand for jewelry is threatened. At this point, many people looking at their monthly mutual fund statements are not feeling as rich as they were a year ago.

And what about the supply of gold? Aside from the market being flooded with extra tons of gold from Central Bank sales, the chief source of gold has been South Africa. Consider that situation which is not far from anarchy, particularly in the Johannesburg area where so many gold mines are. European interests will be difficult to maintain - that is reflected in the low price of South African mining stocks as well. Because gold is a mineral found all over the world, the U.S., Australia, Canada, South America, Asia etc. there is not likely to be any shortage because of the supply. Whatever happens in South Africa, there will be no advantage for anyone to interfere with the gold supply - instead it seems more likely that those who have interests there would probably prefer the U.S. Dollar to shares of South African gold mines.

The fundamental outlook for the gold price is not good. There is plenty of supply and not much demand which is looking even weaker in the future. This is also reflected in the severely diminished number of outstanding contracts at the new York Comex.