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Historical development of the gold price / silver price

In the following, the development of nominal precious metal prices is shown, followed by that of real ones. In the course of the introduction of the US dollar as a means of payment and the establishment of a bimetallic standard to cover it, silver was demonetized in 1792 - corresponding to a ratio of 15 to 1 - and silver prices fell as silver no longer needed for monetary purposes came onto the market. China and India, which still had a silver currency, absorbed portions of the silver.[2]

The long fall of the silver price: silver demonetization 

Despite support purchases and the issuance of silver certificates by the U.S. government, the price of silver fell to US$0.5 in the early 20th century, and as low as US$0.3 during the Great Depression. The Silver Purchase Act, initiated by U.S. President Roosevelt, was intended to stabilize the price of silver at US$1.29 by expanding the number of certificates circulating as banknotes, because the U.S. Treasury had to exchange the certificates at this price or against the issue of an ounce of silver (the U.S. bought more than 2 billion ounces in this way between 1934 and 1941). This triggered deflation in China and the abandonment of the silver currency. The resulting rush of silver to the market countered the U.S. silver price support and China lost its foreign reserves, which, combined with hyperinflation, contributed to the Communists' rise to power.[3]

Performance of nominal and real gold prices since 1900

Historical

Source:  Own calculations and presentation based on data from U.S. Geological Survey (2010), Gold Statistics (internet retrieved 01.10.2012).

Development of nominal and real silver prices since 1900

Historical performance of silver since 1900

Source:  Own calculations and presentation based on data from U.S. Geological Survey (2010), Silver Statistics (Internet retrieval of 01.10.2012).

Silver production, which had halved during World War II, increased only modestly thereafter, while silver demand from industry and photography expanded. The supply gap was closed by government sales in a price-neutral manner as the U.S. began to liquidate its silver inventory of 4 billion ounces (125 thousand tons). This kept the price of silver in check during the 1950s. By the early 1960s, U.S. Treasury holdings had fallen to 2 billion ounces. Since the silver price could no longer be held at US$1.29, the U.S. Treasury limited the redemption of silver certificates to only one year, which initially led to a doubling of the silver price, which, however, collapsed again as expected after the one-year period had expired, especially since large quantities of the silver hoarded in India, amounting to more than 5 billion ounces, now also came onto the market.[4] The silver fairy tale seemed to be over.

Price Rise After Abandonment of the Gold Standard

After the abandonment of the gold standard by the U.S., however, there was no price collapse in 1971 as there had been after the demonetization of silver, but rather price increases. The gold price had been fixed at US$35 in 1934 and had not been adjusted for 37 years, so gold prices from 1971 onwards were for the first time real market prices reflecting the true value of gold, from which the price of silver also benefited due to the close price correlation. in 1975, moreover, the ban on private ownership of gold in force in the USA since the early 1930s was lifted. The 1970s were also characterized - also in connection with Nixon's decision of 1971 - by high inflation rates, in addition to the oil crises, all of which together favored the development of precious metal prices, as well as a legendary speculation, which - as a harbinger of the distortions in the financial sector that can be observed today - shook the financial world at that time to its foundations. (The Hunt speculation)

Artificial price downturn until 2001

After the gold price had risen from US$ 35 to US$ 850 and the silver price from US$ 1.29 to US$ 52 between 1971 and 1980, the artificially induced silver crash was followed by a phase of price downturn or price stagnation that was to last for two decades. It was not until the beginning of this millennium that an upward trend set in again. In relation to the nominal US$ 255 in 2001, the price of gold had increased more than sevenfold by September 2011, when it reached its highest level ever at US$ 1,920, and silver had increased twelvefold from US$ 4 at the end of 2001 to US$ 48 in April 2011.[5] The price of gold and silver has risen more than sevenfold in real terms

Real price development of gold and silver

In the following, the ultimately more meaningful real development of precious metal prices will also be shown. At US$2,400 and US$806 per troy ounce respectively in real terms (in 1998 prices), gold and silver recorded historic highs in the 15th century.[6] In 2010 prices, these were around US$3,000 and US$1,000 per troy ounce respectively. Thus, in 2011, the price of gold peaked at US$1,920, just under two-thirds, and the price of silver at US$48, not even 5% of the real historical high.

 

 

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How to manipulate the official inflation rate

Usually, the Consumer Price Index (CPI) is used for deflation, i.e. the official inflation rate of the Bureau on Labor Statistics. Since the composition of the basket of goods on which the inflation measurement is based is continuously changed, the calculation of the inflation rate is very intransparent. This opens up the possibility of targeted manipulation by the state, which pursues the goal of reporting the lowest possible inflation rates, as this is linked to increases in social security expenditures, transfer payments and pension payments, and it also makes it easier to justify maintaining low interest rates and an increasing money supply, as well as the increasingly fragile paper money system. It is therefore questionable to what extent the CPI provides a realistic picture of inflation. The CPI has the following special features:[7]

  • rising prices are weighted lower than falling prices due to a geometric weighting,
  • the basket of goods does not adequately reflect the structure of GDP; moreover, it is primarily dominated by consumer goods, while the development of asset values and the tax and contribution ratio is not included,
  • the introduction of hedonic price indices takes into account quality improvements, which reduce the inflation rate in a sometimes quite questionable manner.

 

Real gold or silver price adjusted for inflation

If one deflates the gold price with the CPI, the nominal high of 1980 (US$ 850) corresponds to today's real gold price of US$ 2,300 per troy ounce of gold; if, on the other hand, one uses the calculation method that applied in 1980 for inflation adjustment, the real gold price would even be US$ 7,500 according to Shadow Stats.[8] The highest nominal gold price to date in September 2011 (US$ 1,920) reached just 26% of the Shadow Stats level. The nominal silver price high of 1980 (US$52.5), deflated by the CPI, corresponds to a real silver price of US$140; according to Shadow Stats, it would be US$430.[9] The interim high in April 2011 (US$48) reached 11% of the Shadow Stats level, and the silver price of October 2012 (US$33.5) reached just under 8%. Despite the price increases in precious metals that have already taken place since the turn of the millennium, there can therefore be no question of irrational exaggerations or even a speculative bubble on the precious metals markets.

Inflation-adjusted real gold price and silver price

Between 2001 and 2009, both the gold and silver prices increased at an average annual rate in the double-digit percentage range in all major world currencies (from the beginning of 2010 to the end of 2011, the gold price rose by a further 40% in U.S. dollars and by 45% in euros, while the silver price increased by 60% and 65%). The US-$ has thus depreciated by over 80% against gold and silver - on a similar scale to other world currencies. Whereas in 2001 US$1,750 bought 7 ounces of gold and 440 ounces of silver, in October 2012 it bought one ounce of gold and 52 ounces of silver.

 Increase in gold and silver prices in nine different world currencies

Currency

Average increase over the period from
2001 to 2009 in % per year

 

Gold price

Silver price

in US-$

17

18

in Canadian $

13

12

in australian $

12

11

in yuan

15

15

in Indian rupees

17

17

in yen

15

17

in €

12

12

in Swiss francs

12

13

in British pounds

17

16

Source:  Own calculations and presentation based on data from Turk, J. (2010), Gold shines for 9th consecutive year (Internet: goldseiten.de/content/diverses/artikel.php?
storyid=12455, retrieved 01.10.2012).

 

 
This article was written by Dr. Jochen Dehio - author of the book"Gold oder Silber - wem gehört die Zukunft?

More about the author and the book

[1] Vgl. Wikibooks: US-Wirtschaftsgeschichte 1860-1914 – Bimetallismus versus Goldstandard im letzten Drittel des 19. Jh. (Internet: de.wikibooks.org/wiki/Wirtschaft_USA/_US-Wirtschaftsgeschichte_1860_-_1914/_Bimetallismus_versus_Goldstandard_im_letzten_Drittel _des_19._Jh., Abruf vom 01.10.2012). – Dem vom Engländer Thomas Gresham entwickelten Gesetz zufolge verdrängt „schlechteres“ Geld das „bessere“ aus dem Umlauf, da Münzen mit im Verhältnis zum Materialwert überbewertetem Geldwert als Zahlungsmittel verwendet, die mit dem höherem Materialwert dagegen gehortet werden oder ins Ausland abfließen.

[2] Vgl. Friedman, M. (1992), Geld regiert die Welt: S. 77.

[3] Vgl. Friedman, M. (1992), Geld regiert die Welt: S. 164.

[4] Vgl. Ludwig, G. und G. Wermusch (1986), Silber: S. 300ff.

[5] Zwischen 1970 und 2011 lag die durchschnittliche nominale Goldpreisänderung damit bei +9,5 % pro Jahr, die Silberpreissteigerung bei +7,5 % pro Jahr.

[6] Vgl. Deutsch, R. (2006), Das Silberkomplott: S. 16f.

[7] In Anlehnung an Stöferle, R.-P. (2010), In Gold we trust (Internet-Abruf vom 01.10.2012).

[8] Vgl. Stöferle, R.-P. (2010), In Gold we trust (Internet-Abruf vom 01.10.2012): S. 16.

[9] Vgl. Schulte, T. (2010), Silber – die einzigartige Investmentchance: S. 23; Williams, J., Shadow Government Statistics (Internet: shadowstats.com, Abruf vom 01.10.2012).

 

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