Gold can be many things to many people. It can be a commodity, jewellery, currency or money. Most important of all, gold is valued or priced almost anywhere in the world anytime in history, by which goods and services can be exchanged. Gold has done very well this year (increased by ~23%) leading the commodities sector out of the bottom driving stock prices of gold miners much higher in proportion (e.g. share price of Barrick increased by ~131%). To understand where we are and where gold price is headed, it would be useful to take a look the historical gold price trends and see what drove it over the course of major international events. We have charted the last hundred years of gold prices/oz from 1916 to last Friday where gold closed in London at US$1,324.70/oz in nominal terms and compared them in real terms (prices adjusted for inflation to the current US dollars) so readers can see better the “real” underlying trend in the context of recent history. A period of relative stability (gold or near-gold standard years) The Classical Gold Standard year of international exchange system started about 1875 and ended in the beginning of World War I (1914). During the interwar years (1915 – 1944), the price (nominal) of gold was relatively stable and went from a fixed ~US$20 to ~US$35/oz until the Bretton Woods System was established at the end of World War II. Under the Bretton Woods system, the U.S. dollar was fixed to gold at $35/oz and other currencies were fixed to the U.S. dollar. Each country was responsible for maintaining its exchange rate within one per cent of the adopted par value by buying or selling foreign reserves as necessary. In other words, the Bretton Woods system was a dollar-based gold exchange standard. Collapse of Bretton Woods In August 1971, U.S. President Richard Nixon announced the "temporary" suspension of the dollar's convertibility into gold. While the dollar had struggled throughout most of the 1960s within the parity established at Bretton Woods, this crisis marked the breakdown of the system. At that point, gold was abandoned as an international reserve asset and flexible exchange rates were declared acceptable to the International Monetary Fund (IMF) members, whereby central banks were allowed in intervene in the exchange market to smooth out unwarranted volatilities. Oil Crisis and Inflationary Period In October 1973, around the time Bretton Woods collapsed, the Oil Crisis broke out. Oil rose from a nominal price of US$3/barrelbefore the 1973 crisis to around US$40/barrel during the 1979 second oil crisis. This helped cause the consumer price index (CPI) to more than double from 41.20 in early 1972 to 86.30 by the end of 1980. Gold during this period went up from US$45.75/oz in 1972 and peaked at US$677.97 (in January 1980) in nominal terms or at US$2,075 in real terms. The price of gold came down and stabilized when inflation was tamed by monetary policies of major economies from the 1980s to the end of the last century. Interest rates were central banks’ main tool and inflation-control was the goal. Gold relatively stabilized barring sporadic major international events until the end of the century. Super Cycle At the beginning of the 21st century, the China economic miracle set off the Super Cycle with its mega infrastructure projects across the country driving the demand for and prices of commodities across the board unprecedentedly to historical peaks. Gold as both a commodity and currency, as a result, rose with the Super Cycle from ~US$350/oz (in real terms or in nominal terms, ~US$260) in April of 2001 to its peak in August 2011 at ~US$1,918 (in real terms or in nominal terms ~US$1,825). International Financial Crisis and Quantitative Easing In the midst of the Super Cycle, the subprime mortgage problem in the US set off the international financial crisis in 2008. The massive fiscal stimulus in China and quantitative easing by the Federal Reserve sustained the Super Cycle until late 2011 when the fiscal stimulus programs were completed. From there on the price of gold (and of other commodities) went down to the bottom towards the end of 2015. Where is Gold headed? Many factors can affect the future of gold price. Reflecting on the trend of the last century, the current international monetary policy environment is probably experimenting something of historical scale in trying to deal with the aftermath of the international financial crisis. The prime feature of this environment involves massive quantitative easing (QE, or printing money) by major economies (first the US and now the Euro zone and Japan) which is leading to negative interest rates. This environment, in uncharted waters (where the US has some $20 trillion in debt), may likely send gold to its historical highs again. Some forecasters are already predicting over US$2,000/oz in a couple of years. (Written by Sandy Chim, President and CEO, Century Global Commodities Corporation)