over 2 years ago • 2 mins
Five decades after the Bretton Woods system of fixed international currency exchange rates ended, removing the US dollar’s peg to gold, the precious metal’s value in dollar terms has surged – but so has the value of the stock market.
In the decades following the Second World War, the victorious nations agreed to fix their currencies to the dollar, which was in turn convertible to gold at a fixed price of $35 per ounce. The system collapsed 50 years ago this week, when – on August 15th, 1971 – the US unilaterally ended that hallowed gold conversion. The dollar has been a so-called fiat currency ever since: backed by the might of the US government and accepted for useful things like paying taxes, but no longer directly convertible into a physical commodity.
As you can see in the chart above, the removal of the dollar’s fixed exchange rate with gold – marked by the vertical pink line – caused the metal’s price in dollar terms to soar. (The chart is normalized with a value of 100 in August 1971 and uses a logarithmic scale on the vertical axis so the early price moves are more visible).
An ounce of gold is worth roughly 50 times more in dollar terms since the peg was removed. But while those kinds of returns excite gold bulls, the US stock market has also surged by 50x since 1971. In fact, if you plot the S&P 500’s value in terms of gold, it’s pretty much exactly where it was 50 years ago.
The conclusion from all of this is that investments can move in broad sweeps that can take many years to play out. So if you’re too heavily invested in one area – be that US stocks, gold, or something else entirely – you risk missing out if markets move against you. History shows that keeping a broad portfolio and rebalancing it regularly is the safest approach.
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.