How High Could Gold Go?

December 19, 2019

By Patrick A. Heller



The U.S. Exchange Stabilization Fund (ESF) was established as part of the Gold Reserve Act of Jan. 31, 1934. It began operations in April that year, funded with $2 billion of the $2.8 billion paper profit the Federal government realized when it raised the price of gold from $20.67 to $35 per troy ounce.

From the beginning, the ESF was authorized to intervene in the gold market to stabilize the higher price level. It was not until 1970, however, when a law change explicitly authorized the ESF to use its resources to “deal in gold, foreign exchange, and other instruments of credit and securities.”

Government documents declassified over the years have confirmed that the U.S. government did intervene in (meaning manipulate) the gold market to try to hold the price at $35 per ounce. When the task became too large for the U.S. government to handle by itself, it helped establish the London Gold Pool in November 1961, where eight nations agreed to help maintain a stable gold price (see my Aug. 15, 2019, article on the London Gold Pool at The London Gold Pool failed by the end of March 1968, which put greater pressure on the U.S. government to continue suppressing the gold price by itself.

So many foreign central banks were sending paper dollars back to the U.S. Treasury to redeem them for gold at $35 per ounce that then-President Richard Nixon closed the gold-exchange window on Aug. 15, 1971. Technically, this should have been the end of the U.S. government’s “need” to fix gold at $35 per ounce.

When the U.S. Treasury’s gold-exchange was closed, the price of gold was still officially $35 per ounce. However, privately traded gold was changing hands in the low $40s.

By Dec. 31, 1974, gold had climbed to just over $195. That was more than five times the official gold price on Aug. 15, 1971 (and also more than four times the private market price). On that date, it again became legal for private Americans to purchase and hold bullion-priced gold.

However, a new mechanism to enable suppression of gold prices began operation in 1974 – the New York COMEX gold futures contracts. This “paper gold” market involved much greater activity than the physical market, and therefore exerted more influence on the price than did trading in the physical metal. By the end of August 1976, the price of gold had fallen down almost to $100.

In their attempt to corner the silver market, the Hunt brothers also drove up the price of gold to a peak of about $800 in January 1980. Then the COMEX changed the trading rules for precious metals to once again knock down the price.

After the decline from this peak, gold’s price ranged from the $200s to $400s for the next two decades. On May 7, 1999, the Bank of England announced plans to liquidate about half of its gold reserves. These were sold over two years in a process guaranteed to realize the absolutely lowest selling prices. In other words, this was another barely disguised effort to suppress the price of gold.

Also beginning in 1999, the European Central Bank and a number of other nations (not including the U.S.) signed a series of five-year Central Bank Gold Agreements (CBGA). While the intent was to put on a show that there was lots of physical gold available on the market, by the time the second period arrived central bank sales had dwindled to a small fraction of the so-called maximum limit. In years since, central banks, on net, have become net buyers of gold reserves. As a consequence, when the latest CBGA expired this year, there was no effort to renew it.

Once beyond these latter two attempts to suppress gold’s price, the value of the yellow metal rose almost steadily through the first decade of this century. Then, on Sept. 18, 2009, the International Monetary Fund (IMF) stopped pretending it was thinking about selling some of its gold reserves and committed to sell about 12 percent of its official holdings. To the surprise of many, this quantity of gold was instantly snapped up when offered, mostly by the central banks of China and India – with no decrease in gold’s price!

The prices of gold and silver both reached peaks in 2011, with gold topping out just over $1,900 in September. Since then, short-sellers on the New York COMEX market have pushed open positions to many multiples of what they were in 2011. Earlier this week, short-sellers owed more than 69 million ounces but only had about 1 percent of that total available in registered inventories in COMEX bonded warehouses. Such tactics worked to hold down the price until May 2019. Since then, gold is up about 14 percent in price.

If the number of open positions in the COMEX continues to soar, eventually it will become unsustainable. Too many long holders of these contracts will demand delivery of the underlying physical metal upon contract maturity. While the COMEX does permit contract in other forms than the underlying physical metal – including cash, shares of gold exchange-traded funds, or a modest amount of cash plus a contract for the same amount of metal in the London gold market – the risk of a market crash draws nearer literally almost every day (but could go on for much longer than most people would expect).

So, if the price of gold were no longer suppressed by the trading of paper gold in the COMEX futures market, how high could the price of gold rise from today’s levels?

Unfortunately, there is no way to know the answer to that question. You could reference the four- to almost six-times jump in price from Aug. 15, 1971, to the end of 1974 for one indicator. You could look at the almost seven-times increase in price in the decade after the end of the Bank of England concluded its gold sales.

One conclusion about which I am almost certain is that if the “paper gold” market defaults, the price of physical gold will not just rise by a modest percentage. I am confident that it will soar several multiples – probably at least four times and maybe even to 10 times current levels.

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