Week 16, 2011: Gold Prices

Summary: Gold prices this week reached $1500 (per oz) for the first time in history. Prices have been growing steadily since 1999, but have really accelerated since the mid-2000s.

What does the chart show? The price of gold changes daily as people around the world both trade and invest their money in it. The chart above shows the average monthly price, in US dollars per ounce, since 1979. It does not account for inflation, but rather shows the price of gold in dollars at the time, so the earlier peaks (for example, in 1980) are underestimated in today's money. Even so, it shows that gold prices have increased rapidly over the past ten years.

Why is the chart interesting? Increases in gold prices indicate that more people are choosing to hold their wealth in gold rather than in currency, and so a very high gold price suggests a lack of confidence in the global economy stemming from rising inflation, sovereign debt problems, etc. As the price gets higher, so does the risk of the bubble bursting as everyone tries to sell their over-priced gold assets, leading to a crash in the value of gold.

As a side-note to those in the UK: that low point in August 1999 (the lowest point since May 1979) was when the Bank of England were controversially instructed to sell their gold deposits by Gordon Brown, who was the Chancellor at the time. Since then, the price of gold has increased by a factor of six. With the benefit of hindsight, it probably would have been better not to have sold all the reserves of gold when they did.