Since the dawn of civilization, gold, silver, and other precious metals have been regarded by investors worldwide as a unique store of value. Gold coins have been found dating back as far as 800 BC, and for much of human history, governments maintained investor confidence in paper currencies by using “the gold standard”–in which holders of paper notes could freely convert them to gold at a fixed price.
The gold standard was used in the United States from 1900 to 1971, and during that time, foreign governments and their central banks (but not individual U.S. citizens) could freely swap their U.S. dollars for gold held at the Bullion Depository near Fort Knox, Kentucky. Over time, however, gold mine production could not keep pace with growth in the money supply. In 1971, mounting redemption requests forced President Nixon to close the Treasury Department’s “gold window,” ending the convertibility of the U.S. dollar into gold bullion.
While Nixon’s move was imperative for the U.S. economy to continue expanding, it also ushered in a dark period for hard-asset investors that lasted for more than three decades. Although President Ford signed legislation in 1974 allowing private citizens to own more than token amounts of gold for the first time since 1933, it was cold comfort for skeptics of paper money: gold coins were expensive relative to their gold content, and bars were difficult to purchase and store. Gold could be owned through futures contracts, but they were highly leveraged and expired constantly, generating large trading costs. Shares in gold mining companies could be purchased as proxies for gold metal, but they tended to perform more like stocks than gold during a market crisis, and their use of hedging programs to counter declining gold prices further divorced their share price from tracking the market price for gold. Investor interest in silver was badly shaken by the Hunt brothers’ 1979 attempt to corner the silver futures market, while platinum trading tended to reflect industrial, rather than investor, demand.