What's Behind the Record Price of Gold?

Updated Thursday, March 13, 2008

The price of gold continues to hit record highs, with futures trading at $1,000 an ounce this morning. Gold crossed the $900 level in January.

The recent rise comes against a backdrop of widespread concern over the U.S. economy, which according to the Associated Press pushed the euro to a new record and the yen to 12-year highs against the U.S. dollar today, while gold and oil prices also surged.

But the precious metal has been highly valued for thousands of years.

The latest high prices for gold are part of an upward trend that began in April 2001. Analysts explain the bull market in gold by pointing to a slowing economy and the metal's increasing scarcity in the ground.

“Gold is inversely correlated to the dollar,” said George Milling-Stanley, an analyst for the World Gold Council, an organization funded by gold mining companies. “Gold is a safe haven in times of political as well as economic turmoil.”

Trouble is, this extremely rare commodity is getting harder to find.

Miners don’t happen upon rich veins of gold today like they used to. Big mining companies nowadays hope to find mere flecks. Although gold is mined in more than 60 countries, it is estimated only 167,600 tons of gold have ever been mined. In comparison, 999 million tons of iron are extracted annually.

Hard-to-reach pots of gold have become harder and harder to find, and not many new gold mines have come into production in recent years. With the absence of big new discoveries, demand for gold continues to grow, as does its price.

Still, with inflation taken into account, the price is nowhere near as high as it seems.

Golden elements

Most of the gold collected today becomes jewelry. According to the U.S. Geological Survey, 84 percent of the gold produced in 2006 was used for jewelry and the arts.

Gold’s chemical symbol Au comes from the Latin word aurum, which means shining dawn. Combining gold with an alloy element such as nickel or palladium turns gold white.

Beyond its charm, gold’s unusual properties have put it to good use.

Pure gold is relatively soft, with the same hardness of a copper penny (try finding a penny made of real copper, however). It is the most malleable and ductile of metals. Only copper and silver are better at transferring heat and electricity than gold. In addition, gold is extremely resistant to corrosion. Only a solution of cyanide can dissolve the hearty metal.

Gold’s properties have made it an essential industrial metal in technologies such as computers, communications equipment, spacecraft, and jet aircraft engines.

The visors of astronauts’ helmets are coated in a thin layer of gold that reduces glare and keeps them cool.

Gold Standard

Artisans of ancient civilizations used the precious metal to decorate tombs, jewelry, figurines, and beads.

The oldest known objects worked from gold were discovered at a burial site in Bulgaria and were made by members of the ancient Thracian civilization in 4400 B.C.

Since then many societies worldwide have used gold for jewelry and as money. Its monetary value shone so brightly that it was a factor in driving Europeans to explore the New World.

During the 1800s, the United States and many other countries relied on a system of money, called the gold standard, which fixed U.S. currency to the price of gold and silver.

The system was rocked when the SS Central America and its three tons of treasure sunk off the coast of South Carolina in 1857. The loss led to the economic depression that lasted until the Civil War.

In 1900 the Gold Standard Act officially set a golden value for the dollar, but the act did not live long. In 1933 President Franklin D. Roosevelt outlawed private ownership of gold, except for jewelry.

The Bretton Woods system of 1946 (which established rules for financial relations among the world's major industrial states) allowed foreign governments to sell gold to the United States treasury for $35 an ounce. But in 1971, President Richard Nixon ended the system, and officially ended the gold standard. Since then world currencies have not been formally linked to gold.

In the money

The latest price surge is not the first driven by economics and politics.

During World War I, a shortage of manpower closed many gold mines. Mines were brought back into production during the Depression. In 1934, the price of gold was raised from $20.67 to $35 an ounce, and production increased to more than 4 million ounces annually.

Although the $1,000-an-ounce mark does have an unfamiliar and ominous ring to it, the World Gold Council’s analyst Milling-Stanley points out that the benchmark is deceiving.

The previous all-time high of $850 in 1980 was the result of “a slew of special circumstances,” Milling-Stanley told LiveScience, such as inflation, 40 years of pent up investing and the perception that Jimmy Carter was a weak president.

After 28 years of inflation and a weak dollar, it will take a big push in the markets to surpass the 80s high in real terms. Gold would have to hit $2,200 an ounce in today’s dollars to match the 1980 price, Milling-Stanley said.

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