In 1971, Richard Nixon suspended the convertibility of the dollar to gold . It is widely believed that he suspended definitively, but according to Rickards, the suspension was to be temporary. Nixon wanted to organize a conference similar to that of 1944 from Bretton Woods. He wanted to devalue the dollar and then resume gold convertibility at a different price.
James Rickards maintains that two people who were with Nixon at Camp David in 1971 confirmed this version. One of them was the lawyer Kenneth Dam . The second, then secretary of the treasury Paul Volcker (in 1975-1979 president of the Fed). Both confirmed that the suspension of gold convertibility was to be temporary.
In 1971, a conference was held in Washington, which resulted in the signing of the Smithson Agreement. The dollar has been devalued from USD 35 per ounce of gold to USD 38 per ounce, and later to USD 42.22 per ounce. It was also devalued against the currencies of Germany, Japan, Great Britain, France and Italy.
However, there has never been a return to the gold standard. Germany and Japan were persuaded by Milton Friedman to make a floating exchange rate, and Nixon engaged in a re-election campaign in 1972, followed by the Watergate Affair, so he lost his focus on gold. The official convertibility of gold has not been restored, and in 1974 the International Monetary Fund announced that gold was not a monetary resource. Since then, it has become the subject of teaching at universities not in economics, but in mining - only in the context of raw materials.
However, something else happened - in 1974 President Ford signed the act repealing Roosevelt's executive regulation no. 6102 of 1933, which forbade citizens to own gold. This meant that after more than 40 years, gold was again legal. Although the official gold standard was dead, a new private gold standard began.
Three bull market
Until now, the price of gold was set officially - the decision on how many dollars could be exchanged for an ounce of gold was taken from above. As gold became the subject of free trade in the free market, we began to gradually learn its true value.
In the years 1971-1980 we observed the first bull market, when the price of gold increased by 2200 percent. In the years 1999-2011 we saw the second bull market - an increase of 760 percent. Currently, according to Rickards, we are seeing a third bull market in gold. Since December 2015, the price of gold has increased by 65 percent This is a good, strong increase, but in relation to the previous two periods of growth, it is only symbolic.
Three factors for further increases
James Rickards lists three potential factors that could push the price of gold to levels he has been talking about for a long time.
Loss of confidence in the dollar
By far the most important of these is losing faith in the US currency. Currently, as part of the fight against the effects of the coronavirus pandemic, the central bank is taking actions under the so-called non-standard monetary policy instruments (reprints of money) that have absolutely no precedent. Quantitative loosening can, in theory, bring some benefits during a recession to boost the economy. However, when it becomes the main tool in the fight against recession and is definitely abused, it does more harm than good. One of the consequences of such a turn of events may be, for example, hyperinflation, and this - as the case of Venezuela shows - can push gold prices to levels absolutely unheard of.
The bull market continues
Further increases may result from continued bull market. Based on the previous two bull market as benchmarks, the average profit would mean that by 2025 the price of gold would have been USD 14,000.
"New disaster"
As a third factor that could push gold prices to sky-high levels, Rickards points to another catastrophe - the second wave of pandemics, the collapse of the gold paper market due to inability to meet physical gold delivery obligations or, for example (Rickards opinion), Joe Biden's victory in the presidential election.
Anyway, it is known that gold did not say its last word. Given the scale of the previous two periods of growth, we are still at the very beginning of the bull market and there are many reasons to fear for the future.
Even if the probability of all these black scenarios is less than the probability of a house fire (and it is not), why is it so easy for us to buy home or flat insurance, and we question the legitimacy of having gold? Rickards has also provided answers to this question - since 1974, universities have been learning that gold is a mineral, not money.
