Is now a good time to make a gold investment or a silver investment? The gold price and the silver price have both risen steadily, and rather dramatically, from 2005 to the present.
Has this rise run its course or is it merely a beginning? These important questions deserves honest consideration. The following information shows why great upward pressure remains on gold and silver prices, making possible even more dramatic increases.
From 1792 to 1933, the gold price was $20.67 per ounce in the United States – all money could be exchanged for gold. In 1933, the US went off this gold standard, devalued the dollar to $35 per ounce of Gold, and forbade any US citizen from holding or owning any gold. Foreign citizens and banks could, however, convert their US notes into gold. After World War II, the gold-backed US dollar became the world’s key currency for several reasons:
In 1971, the dollar became fiat money; the dollar became merely a paper note having neither value in itself nor backing in real assets. This happened when President Nixon ended the ability of foreign banks to convert their US dollars into gold. Nixon’s action eliminated the official $35 per ounce price of gold – the value of gold and the value of the dollar were no longer linked.
The private market, which in 1968 was allowed to set a separate price for gold, then determined the world’s only gold price. At the time of Nixon’s order, the gold price had recently risen to about $40 per ounce and the silver price was about $1.40 per ounce. (The market quoted gold and silver prices in US dollars per ounce.)
Since 1971, the value of the fiat dollar lay in the US government’s declaration that the dollar is legal money to exchange for goods and services. The US Treasury could then pay its bills and its debts in fiat dollars. Standing behind the national debt has been the increasingly shaky assurance that the US government, or rather the US taxpayer, is good for every dollar that is owed. Still, for almost 40 years, the dollar has remained the world’s currency standard largely because of the past strength and continuing importance of the US economy.
After the dollar had become fiat money, gold and silver prices increased modestly at first. But by the end of 1974, when the right of US citizens to own gold was finally restored, the price of gold had risen above $180 per ounce and the price of silver above $4.00 per ounce.
As precious metals and former currency standards, gold and silver prices almost always rise and fall together. What factors affect their price? Is now the time to make a profitable gold or a silver investment?
Yes, now is a great time for a gold or silver investment. The US and the world are on the brink of changes that could heighten economic uncertainty, and even produce fear. Of course, no one can predict any future price, but such uncertainty increases the demand for gold and silver and drives their prices up.
Unusual or extreme conditions existed during three times when the price of gold and silver rose abnormally high. These factors often accompany economic uncertainty and higher gold prices.
1973-1975: Troubling the nation and world were the Watergate scandal, President Nixon’s resignation, and Arab members taking control of OPEC and cutting oil production. Inflation was high and spiked to over 12%. The rise in the gold coincided with consumer confidence plummeting to an historic low. Additionally, gold climbed and fell nearly in tandem with both inflation and the unemployment rate, which reached 9%. Interest rates also surged to a post-war high of 12% just months before gold peaked at nearly $200 an ounce.
All of 1980: This was the year of the Iran hostage crisis. Gold and interest rates were both extremely high and extremely volatile. The price of gold skyrocketed to $850 per ounce, dropped to $485, and surged again to $710 before dropping again. Interest rates followed gold by a few months in rising to 20%, falling to 11%, and climbing back to 21% by year’s end. Consumer confidence plunged briefly and the inflation rate grew to over 14%; it was higher than 11% for nearly two years.
1982,83: Consumer confidence was very low for a prolonged period, likely caused by the highest unemployment rates since the great depression and a very high interest rates, still over 16% when gold began its rise from $296 per ounce. Inflation, however, had dropped below 7% and continued to drop as the gold price stayed between $395 and $510 per ounce.
Long term budget deficits decrease a country’s economic stability.
When a nation borrows money or increases its (fiat) money supply by printing, the value of its currency decreases. Gold, however, maintains its value. Thus, when the dollar loses value, the price of gold generally increases and vice versa.
From 1988 through the end of 2001, through the market crash of 2000 and even 9/11, the price of gradually gold fell while the dollar’s value was erratic until 1995 when it increased dramatically. Unemployment, inflation, and interest rates were all low and produced the feeling of economic stability.
In January 2002, the price of gold began its rise from $280 per ounce to over $900 per ounce in 2008. During that time, the inflation rate, the interest rate, and the unemployment rate all remained low, while deficit spending and borrowing increased. Uncertainty began to build because of the wars in Afghanistan and Iraq. Gold prices seemed to rise and fall with the conditions in the Middle East, rising with the deterioration in 2006 & 2007 and falling in 2008 with the improvement in Iraq.
Dire economic conditions built up across the globe throughout 2008 and gold began a steep rise to its current price near $1200 per ounce. There are many reasons for that. Unemployment rose and stayed high. Deficit spending, debt, and money supply increases hurt currencies and economies. While gold prices are most affected by the stability of the US economy, deep weaknesses in the Euro and in many European economies have contributed to the current uncertainty.
Unfortunately, the economic uncertainty is likely to increase and put even more upward pressure on gold and silver prices. A gold investment or a silver investment could now be highly profitable for several reasons.
Of course, none of these events are desired. Yet, with eyes open, the wise person will be prepared and the wise investor will seriously consider purchasing gold and silver.