Gold Price

There are two ways to look at the price of gold. The most common way is to think of gold price in terms of a national currency such as US Dollars. We tend to think this way because gold is quoted as being worth some number of currency units. We buy and sell gold in currency units. As the gold price fluctuates we think of how many currency units we can get for an ounce of gold.

The other way to think about gold price is that currency units are a function of gold. Thinking this was means gold is a constant and currency units fluctuate. For example, in 1792 the US Congress passed the Coinage Act that fixed the US Dollar to be 24.75 grains (0.052 troy ounces) of gold. In 1837 Congress redefined the Dollar to be 25.8 grains of 90% gold. That works out to be $20.67 for one troy ounce of pure gold. This gold price was maintained for almost one hundred years from 1837 to 1933. In 1934 President Roosevelt devalued the Dollar to be worth $35 for once ounce of gold. President Nixon removed the link between the Dollar and gold in 1971. Since that time the gold price has been free to move based on market demands. Gold has gone from $34 in 1971 to over $1000 in 2008. The Dollar has lost 97% of its value versus gold in thirty eight years.

For most of history gold was money. Paper currencies, or now, digital accounting, are a fairly recent development. Some argue that looking at gold as the constant is the proper and more fundamental view and currency unit price is basically a fad. Both perspectives are necessary today as they are really just two sides of the same coin.