The History of Trading Gold
To understand the value of trading gold, it helps to know
the history of this commodity, which has been considered
a valuable physical asset for thousands of years.
Since its discovery, gold—because of its rarity and difficulty
to mine—has been considered a currency and an investment,
used to create political power and settle trades.
In 1946, after World War II ended, the Bretton Woods
conference fixed the price of gold at $35 per ounce—and
created a gold standard in the United States, meaning
that gold backed the U.S. dollar. With the price of gold
fixed, trading gold was pointless.
In 1971, the United States, under the leadership of
President Nixon, abandoned this system, paving the way for gold trading (although central banks around the world still hold gold for use in times of emergency). This action culminated in 1974, when the United States lifted a 41-year ban on the private ownership of gold by U.S. citizens, allowing individuals to profit from trading gold.
In the nine years following the abandonment of the
gold standard, gold prices skyrocketed, rising 2,200%
in U.S. dollar terms and peaking higher than $800
in the early 80's much to the glee of gold traders around the
world. But gold trading wasn’t as easy as it seemed:
This gold market rally was followed by a 19-year bear
market for gold, when gold prices dropped as low as $260
in 1999, much to the gold traders’ chagrin. But the gold
market, like other markets, is cyclical, and despite the fact
that gold has now reached new all time highs in excess of $1600,
in real terms—that is, adjusted for inflation—this is still well below
the $850 peak reached in 1980.
Although it is impossible for gold traders to predict gold prices, we do know one thing: Volatility is the new reality when it comes to trading gold. But that is not necessarily bad: Gold traders can benefit from upturns as well as downturns by buying long or shorting gold. The key to successfully trading gold is finding the trend amid the volatility. In subsequent articles, we will offer tips for doing so.
