Historical Background

Major Historical Events Relating to the Monetary Role of Gold

Pre Nineteen Sixties

Gold has been used as a means of exchange for over 3,000 years. The Gold Standard was gradually evolved to become the basis of Britain’s monetary system in 1717 and was more widely adopted in Europe in the last years of the 19th century. The United States went onto the Gold Standard in 1900. Internationally, free import and export of Gold meant that balance of payments deficits were settled in the metal; Gold flowed out of a country in deficit, into a country in surplus.

On the outbreak of World War One, Britain itself officially suspended the Gold Standard in 1919, but returned to a Gold Bullion Standard in 1926 under which notes could only be exchanged for 400 ounce good delivery bars. However, the economic turmoil of the early 1930s forced most nations off Gold (Britain in 1931, the United States in 1933). Only movement of Gold between central banks and governments was permitted. This created the Dollar Exchange Standard under which dollars could be traded for Gold at the Federal Reserve. This system was confirmed by the Bretton Woods Agreement in 1944 and lasted until 1971.
In 1934, President Roosevelt raised the official price at which the Federal Reserve would buy and sell Gold to $35.00 an ounce, a level which the United States and European Central Banks struggled to maintain until 1968.

In Nineteen Sixty

Due to growing demand in the free market for gold for jewellery and investment, the Gold Pool was formed by the USA together with Britain, Belgium, France, Italy, Netherlands, West Germany and Switzerland, with the intention of keeping the free market price close to the official parity of US$35.00 an ounce. This new set up was effectively an extension of the Exchange Stabilization Fund giving the Treasury the authority to increase the supply of Gold in order to depress the free market price if necessary.

In Nineteen Sixty Eight

Central Banks suspended operations of the Gold Pool and the London Gold Market was closed for two weeks. This was a direct result if increasing worldwide speculation in Gold due to an uncertain international monetary market and pressure on the US dollar after the TET Offensive in Vietnam.
During the closure of the London Gold Market, Credit Suisse, Swiss Bank Corporation an Union Bank of Switzerland formed the Pool in Zurich to undertake Gold transactions. South Africa started regular Gold sales through the Zurich Pool.
The Two-tier System was launched under which Gold transacted in the private and official monetary sectors was handled separately.

In Nineteen Sixty Nine

Singapore liberalized the Gold market for non-residents.
Restrictions covering imports of Gold coins minted before 1934 were lifted in the USA.

In Nineteen Seventy One

Russia resumed selling Gold to London, the first time since 1966.
The USA suspended Gold convertibility of US dollar.
President Nixon agreed at the Acoren Meeting to devalue US dollar. The Group of Ten agreed on the re-alignment of the parities with a devaluation of 7.89% for US dollar which turned the new official Gold price to US$38.00 an ounce with variation of 2.25% each side.

In Nineteen Seventy Three

Japan liberalized Gold imports.
The US dollar was devalued for the second time and the official Gold price was set at US$42.2222 an ounce.
The official Two-tier System was discontinued.
Singapore liberalized the Gold market for residents.

In Nineteen Seventy Four

Hong Kong liberalized the Gold market following the dissolution of the Sterling Area in 1972.
EEC Finance Ministers reached the Zeist Accord under which Central Banks may trade Gold between themselves at market related prices. If Central Banks buy gold from the free market, the effect of these operations should not be to increase their net Gold holding.
Finance Ministers of the Group of Ten agreed that Central Banks may use their Gold reserves as collateral at market related prices for foreign loans.
President Ford of the USA and President Giscard Estaing of France agreed that Central Banks may revalue their Gold reserves at market related prices.

In Nineteen Seventy Five

The USA liberalized the Gold market.
US Treasury auctioned and sold 2.5 million ounces of Gold.
UK suspended imports of Gold coins issued after 1837 including Krugerrands.
The Group of Ten agreed that the Bank for International Settlements (BIS) can participate in the IMF auctions.
Members of IMF reached agreement to abandon the official Gold price and to restitute 50% of Gold to members at US$42.2222 an ounce. It was further agreed that Central Banks can buy and sell Gold in the free market and that 1/6 of the IMF Gold reserve was to be auctioned with the proceeds received used for helping under-developed countries.

In Nineteen Seventy Six

The Group of Ten agreed not to buy Gold in the free market before the revision of the IMF Articles of Association. However, they agreed that BIS can buy Gold on their behalf.
Germany and Switzerland granted credit of US$250 million to Italy against collateral of Gold. South Africa announced the overseas loan granted to them against collateral of 5 million ounces of Gold.
The IMF commenced monthly auctions of Gold which would continue for 4 years and 25 million ounces of Gold would be offered for sale. They would also restitutes a further 25 million ounces of Gold to the member countries in the Fund.

In Nineteen Eighties

The price reached the historical high of US$850 an ounce in 1980 but declined to the low of US$284 an ounce in 1985. The level of trading activities declined considerably in the decade but the physical off-take continued to accelerate, particularly in Asia. The status remains currently unchanged in major Gold markets.
Central Banks and central authorities were buyers and sellers of Gold periodically in the 1980s and 1990s. The IMF "All Countries" Gold holdings were 905.1 million ounces at end February 1995.

In Nineteen Nineties

The average dollar price remained almost unchanged between 1994-1996 and then had a sharp fall to US$250.00 from 1996 to the end of 1999.
The other significant changes were the decline in investment interest, which resulted in a sharp fall in coin and bar hoarding demand, and a switch from modest European and North American investment in 1995 to more substantial disinvestment in 1996