Which event is the turning point for gold?

The Nixon incident in 1971 was an important turning point for gold for the world economy. Announcing the abandonment of the exchange between the U.S. dollar and gold, and abolishing the gold price of 35 U.S. dollars per ounce stipulated by the Bretton Woods System in 1945, and then determining the price according to demand and supply. In addition, the currencies of major countries have changed from fixed exchange rates to floating exchange rates.

The Nixon shock in 1971

When thinking about the relationship between gold and the economy, the Nexen shock can be described as the heaviest event in history. Nixon shock, as the name suggests, the US President Nixon at that time shook the world with two moves. One is a surprise visit to Beijing, and China and the United States resume diplomatic relations. The other was a sudden announcement on television in August 1971 to stop the exchange of gold and US dollars.

The gold dollar standard established in 1945

As early as 1816, the United Kingdom took the lead in using the gold standard (guaranteed the exchange of gold and banknotes, and the banknotes issued must have an equivalent value of gold as a reserve). Since then, major countries have also introduced one after another, and the international gold standard basically took shape at the beginning of the 20th century. When trading between the two countries, there must be currency exchange (foreign exchange transactions). The gold standard system is a fixed exchange rate system that determines the exchange rate of each country’s currency with gold as the currency. But then the First World War broke out, and the relations and economic strength of various countries have undergone tremendous changes. Each country has changed to independent management currency systems, and the gold standard has lost its function. Gradually, the economy became increasingly antagonistic, and the Second World War broke out. Out of introspection on the above-mentioned process and in order to implement more stable foreign exchange transactions, major countries gathered in Bretton Woods, New Hampshire, the United States for consultations in 1944.

In 1945, the IMF (International Monetary Fund) was born and established the “golden dollar standard”, which used gold with international value and the dollar, the currency of the United States, which had the strongest economic strength at the time, as a means of settlement. It is stipulated that the United States can exchange 35 dollars per ounce for gold at any time, and it also determines the exchange ratio between the U.S. dollar and the currencies of other countries. This is called the “Bretton Woods System (fixed exchange rate system)”.

The collapse of the gold-dollar standard

The exchange between the U.S. dollar and gold stipulated by the “Bretton Woods System” was suddenly abandoned, which is called the Nixon shock. After the 1960s, because of the Vietnam War, the United States’ overseas debt increased and its fiscal revenue deteriorated. “Can the exchange with gold be guaranteed?”, “Is it okay to continue holding US dollars?” Due to this kind of anxiety, the trend of dumping US dollars for gold is active. Germany, France, Switzerland, etc. exchange large amounts of U.S. dollars for gold, and the gold held by the United States has repeatedly been sold out. At its peak, the total amount of gold in the world was 30,000 tons, and the United States had 20,000 tons, but only 8,134 tons were left when Nixon announced the suspension of exchange. Although it is stipulated that the issuance of US dollar banknotes exceeding the amount of gold reserves is prohibited, the reduction of gold has lost balance with the issuance of US dollars, and the exchange with gold can no longer be guaranteed.

The era when the price of gold is determined by supply and demand

The Nexen shock disengaged the linkage between gold and the U.S. dollar, and the price of gold became freely determined by supply and demand. At the same time, after the Nexen shock, the “Smithsonian Agreement” was reached in response to the currencies of various countries, and the foreign exchange market was re-adjusted to maintain a fixed exchange rate system but ended in failure. Since 1973, it has changed to a floating exchange rate, and the exchange rate is determined according to the economic strength of various countries and the supply and demand of currencies until today.

Buying gold in troubled times causes the price of gold to soar

After the price of gold becomes determined by the supply and demand situation, gold is largely affected by world economic trends. Wars, economic prosperity, and economic depression will all lead to changes in the price of gold. After entering the 21st century, the general anxiety about the world economy has caused the price of gold to rise.

In recent years, the relaxation of financial policies in various countries has been the most important factor in the rise of the gold market. The relaxation of finance means that central banks of various countries must continuously provide funds. The real interest rate is negative, and the capital originally used for equipment investment and consumption flows into the gold market. With the advancement of the relaxation of financial policies, the price of gold continues to rise. In addition, excessive liquidity may become a hotbed of inflation, pushing the rush to buy gold to a climax.

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