With the exception of a short-lived sojourn above the $US 400 level in February 1996, the $US Gold price was "trapped in amber" for two years, from the beginning of 1994 to the beginning of 1996. For all but about a month of those two years it was caught in an extraordinarily tight $US 20 trading range between $US375 - 395. By late 1995, the volatility on the Gold market had reached its lowest level since the late 1960s, when the Gold price was officially capped at $US 35 an ounce.
Consider what had happened during this three-year trading range:
A debt crisis in Mexico.
A debt crisis in the State of California.
A global bond market bloodbath - in 1994.
A trade war between the U.S. and Japan averted at the last second.
A huge boom on the U.S. stock market - in 1995-96.
The U.S. Dollar plummeting to record lows against the Yen and multi-year lows against the D-Mark.
Debt collapse and actual deflation in Japan.
The near total dependence by the U.S. Treasury on foreign buyers to buy newly-issued U.S. government debt. Foreign Central Bank holdings of U.S. Treasury debt expanded rapidly throughout the period.
A "balanced budget" debate in the U.S. which led to two government shut downs in October 1995 and January 1996.
A $US 600 Billion increase (to $US 5.5 TRILLION) in the U.S. debt ceiling. Even more interesting, this Gold "trading range" against the U.S. Dollar has not been reflected in the Gold price of other major currencies. The high and low spot Gold prices against the world's three major currencies over the three year period 1994-96 were as follows
|U.S. Dollar||$US 416||$US 369||$US 47||12.74%|
|German Mark||DM 689||DM 528||DM 161||30.49%|
|Japanese Yen||YEN 44,660||YEN 31,870||YEN 12,790||40.13%|
"Change" is the percentage difference between the high and low prices
Yes, the U.S. Dollar did some spectacular swoops and dives against the other two currencies over these two years, but that's not the point. The point is that the U.S. Dollar Gold price stayed so stable, despite all these swoops and dives.
How was Gold kept in such a narrow trading range against the Dollar? Through the use of the markets for "derivative" paper instruments based on Gold; through unprecedented "forward selling" programs undertaken by Gold producers; through "Gold leasing" undertaken by Central Banks. And, in a pinch, by the actual sale of Gold by Central Banks.
In the U.S., the other main feature of this period, especially in 1996, was a huge boom on the stock market, relentlessly falling unemployment, and price increases in the economy which slowed to a crawl and, in many cases, actually went into reverse.
There were actually several purposes served:
To encourage the attitude that Gold had lost its former use as a "hedge" against price inflation and political and economic crises. This was done very successfully. The last time that Gold reacted to political events was the lead up to the Gulf War way back in late 1990.
To encourage the attitude that (price) inflation was "dead".
To foster the attitude that all the financial crises of late 1994 to early 1996 were under control. After all, the Gold price was not reacting to them.
To give added credence to the much-ballyhooed (especially in the 1996 election campaign), claim that U.S. debt was under control and that the U.S. was smoothly working its way towards a balanced budget.
The most important purpose by far.
To re-reinforce the notion - still held by millions of people throughout the world - that there was still a "link" between Gold and the U.S. Dollar.