Gold Stock Investor

Free Articles

The Nixon Shock

Although it went virtually unnoticed, this past August 15th marked a very important anniversary. It’s been 50 years since U.S. President Nixon, in 1971, announced on television that he was “closing the gold window”. That ended the dollar’s convertibility to gold (officially at $35/oz.). It also brought and end to the long-standing relationship between precious metals and money.

But first, let’s back up a little to understand how we got there.

In 1944, after living through World War I and World War II in just 25 years, coupled with ongoing political and economic problems between many nations, the Bretton Woods Agreement was established. Its goal was to manage currencies and commerce between most of the U.S., Canada, Australia, Western Europe, and Japan.

The main takeaway from Bretton Woods was that participating nations had to establish monetary policy maintaining fixed exchange rates between their currency and a reserve currency, the U.S. dollar, which itself was convertible to gold at $35.

Foreign governments and their central banks were then able to exchange dollars for gold from the U.S. upon request. This made the U.S. dollar “as good as gold”. In effect it led to the dollar becoming the world’s reserve currency, and a majority of international transactions were consummated in the greenback.

But the U.S. itself embarked on costly wars in Korea and later Vietnam. President Johnson rejected taxation to pay for Vietnam War expenditures. So the U.S.’s positive trade balance rapidly declined as dollars flowed out to pay for military spending and inflation soared. Foreign holders recognized the loss of purchasing power of the dollar. The French coined the term ‘America’s exorbitant privilege’, referring to the US dollar’s benefits as the world’s reserve 5 currency. In 1965 French President Charles de Gaulle sent the French Navy to America to collect gold in exchange for its U.S. dollar reserves. Many others quickly followed.

To end the outflow of gold, on August 15, 1971, Nixon ‘closed the gold window’, suspending the convertibility of the U.S. dollar to into gold. That effectively ended a key feature of the Bretton Woods system, and it subsequently fell apart. Currencies were soon allowed to float at fluctuating market exchange rates. With the dollar no longer tied to gold, the U.S. was free to print and inflate the money supply at will.

During the following decade the dollar, now completely untethered from gold, went on to lose a third of its purchasing power. It was during the 1970s that gold enjoyed its last secular bull market. That took the metal’s price from $35 in 1971 all the way to $800 in 1980. It was a spectacular run that produced a staggering 2,286% return.

I believe the current secular gold bull which began in 2001 around $250 per ounce will easily outperform the 1970s bull market. How high do I think gold can go? You’ll have to read the next section for my ultimate gold price target and why I think it’s achievable.

Newsletter

Peter Krauth is a former portfolio adviser and a 20-year veteran of the resource market, with special expertise in precious metals, mining and energy stocks. He is editor of two newsletters to help investors profit from metal market opportunities: Silver Stock Investor, www.silverstockinvestor.com and Gold Resource Investor, www.goldresourceinvestor.com. In those letters Peter writes about what he is buying and selling; he takes no pay from companies for coverage. Peter has contributed numerous articles to Kitco.com, BNN Bloomberg, the Financial Post, Seeking Alpha, Streetwise Reports, Investing.com, TalkMarkets and Barchart, and he holds a Master of Business Administration from McGill University.

Recent Posts

Testimonials

"I really like your work. Discussing why physical is important shows a complete grasp of your field--not just some stocks. The "strengths" and weaknesses conclusion is a concise summary that I haven't seen before"

-BJ (February 2021)