Off the Gold Standard
Up until 1968, the U.S. dollar literally represented a fixed amount of gold. For every dollar in circulation, the U.S. government had gold to back it up somewhere in its vaults. Dollars held in foreign hands were "convertible" to gold at a price fixed by the U.S. Treasury. From 1934 to 1967, that fixed price was $35 per ounce. But as government spending grew out of control in the 1960s, inflation caused the U.S. Treasury to raise gold prices to over $40 in 1970. By the end of 1971, more and more foreign-held dollars were being presented to the Treasury for conversion to gold and threatened to drain the U.S. national reserve. In 1972, the U.S. ended dollar convertibility and abandoned the U.S. gold standard.
Wild Price Fluctuations
When the dollar ceased to have any gold backing, it became simply an abstract store of value, backed by the "full faith and credit" of the U.S. government. This resulted in wild fluctuations from $40 to over $800 in January 1980, as world markets struggled to determine what a non-gold, "paper" dollar should be worth. In the late 1980s and '90s, gold prices settled down to levels last seen during the 1970s. For example, the average price for 1989 was $381, and in 1999 was $278.76.
What Happens Next?
Even with this relative stability, gold fluctuates enough to change the price tag on fine jewelry. The price of gold surged from roughly $278 per ounce in January 2002 to $382 in February 2003, during the buildup to the war in Iraq. Today, an ounce of gold is more than $400 an ounce.
Graduate Gemologist, GIA
Certified Appraiser