How the Fed Controlled the Price of Gold From 1982 Until 1995
The comments below are an edited and abridged synopsis of an article by Jan Nieuwenhuijs
You could interpret this article as being in contradiction to Nieuwenhuijs’s previous article, “Europe Has Been Preparing a Global Gold Standard Since the 1970s.” There, he wrote that in the 1970s the US tried to phase out gold from the international monetary system. There is no contradiction, however; America’s goal was US dollar hegemony.
In the early 1980s, the global dollar standard was firmly established, and the US sought to sustain its position by stabilizing the dollar. Ironically, it did so by stabilizing the dollar price of gold. Still, through the 1980s and 1990s, America’s trade and fiscal deficits persisted, so its political needs were met through its exorbitant privilege.
Some economists view the period covered by this article as a pseudo-gold standard. Others disagree because, strictly speaking, the Fed was targeting inflation and not the price of gold—gold stabilizing was a side effect.
The Fed did not specifically target the gold price; then-Fed Chair Alan Greenspan achieved consumer price stability, which was enforced by a stable gold price. The gold price stabilized in 1990 at around $390 dollars per ounce, and inflation stabilized two years later at 2.5%.
What hasn’t been addressed yet is gold leasing. Starting in the 1980s, there was a buildup of central banks’ gold on lease that caused downward pressure on the gold price. When central banks lend their gold (usually to bullion banks), physical supply in the market increases, which puts pressure on the gold price. However, when the loans need to be repaid physical demand increases, and the initial downward pressure is undone. Leasing has a temporary effect on the market.
The peak of central banks’ gold ‘in the market’ is said to have been in 2000 at 5,000 tonnes (of which European central banks contributed 2,119 tonnes). So, leasing suppressed the gold price until 2000, after which it jumped. To what extent gold leasing distorted inflation expectations and US monetary policy from 1982 until 1995 is unknown.
These days, the Fed is not inclined to raise rates, although the gold price is rising, because of the massive debt overhang. Currently, inflation is seen as a cure rather than a poison, with all due consequences.