Bitcoin’s debut into ETF markets has so far been a blazing success, with inflows of over $111 billion in March according to Bloomberg, following over $25 billion and $40 billion in January and February respectively. For scale, gold ETFs traded $2.5 billion in March.
A much-hyped debut of a new financial product onto American financial markets is something gold experienced for itself almost 50 years – when the ban on US citizens owning gold ended on the last day of 1974, after 41 years. But gold’s return to the US financial scene was, to put it mildly, less of a success than Bitcoin’s has been so far, and it probably caused the end of the six-year bull run gold had enjoyed to that point.
Gold prices had been surging for two years in the run-up to its return to US markets in expectation of demand from a US public who had been suffering from high inflation, which many feared was still out of control. This first post-Bretton Woods bull run in the gold market saw prices peaking at $195, up over 450% in those six years. This peak was reached the day before US investors could start buying, in an ironic example of gold market optimists having every expected chicken counted just before the hatching. New Year’s Eve 1974 saw four US commodities exchanges begin trading gold futures. There had been real excitement in markets in the run up to “G-Day”, as newspapers called it at the time, with advertisements to smaller investors proclaiming that “the Arabs will buy gold” and trying to draw them in with taglines such as “You no longer have to be rich to own gold”.
Not everyone agreed, subscription investor newsletters privately proclaimed that the market was opening up for the “Great American Gold Sucker” and that gold was a “stupid Investment”.
Official circles expected demand for gold in the US to be “unprecedented” and an auction of some official gold reserves was planned for 6 January. The aim of the auction was to stop large-scale imports of foreign gold into the United States – a flow was viewed as inevitable as demand would outstrip the available domestic supply.
Government officials were less worried about satisfying new gold investors and more that the flow would be so large as to have a significant effect on the United States’ balance of payments and the liquidity of its banks. The U.S. Treasury worried that there would be a flood of demand to get out of paper currency and into gold.
But in what the New York Times described as more of a crawl than a rush to gold, these markets failed to catch fire and draw in new American investors. Expectations of a gold boom could, and perhaps should, have been tempered by the experience in April 1973 of the Japanese market opening up to domestic investors.
Japan saw steady early demand, but interested investors were satisfied within a few months. Despite this, US markets, newspapers and officials were expecting the pent-up demand of 40 years from prohibition to burst like a dam on New Years across the country.
This is the Way it Began: Not with a Bang but a Whimper
Why did the demand fail to materialise? One reason seems to be that small American investors had no experience of owning gold and many thought of gold as a “curiosity rather than investment”. Any memories of owning gold were tainted by the enforced sales to the government in 1932, which were still fresh enough in 1974 to see letters to the Financial Times talking about the possibility of Krugerrands being confiscated. Another was that large speculative positions had built up in advance in markets where gold could be traded such as London, as international investors tried to get in ahead of the expected gold rush.
As the expected demand failed to materialise, these speculators started selling and the volume on futures markets was only a trickle. Some of this pre-speculation was likely undertaken by US investors, some of whom had been flouting the ban by holding gold in London since the 1930s (O’Connor and Lucey, 2023). Lastly, smaller gold investors tend to be price sensitive and with the gold price reaching new records regularly, it can be assumed that many didn’t see much of a bargain in investing at an all-time high. Buying physical gold at the time also incurred a sales tax in the US, and though gold mutual funds were available, their tax status was unclear, discouraging this avenue.
When the auction of official gold took place on 6 January, the lack of demand was even more clear. Most buyers were international banks, with a large chunk of the sales going to Germany, including 400,000 oz. for Dresdner Bank alone. International buyers had to assure the U.S. Treasury that they were not acting for foreign governments, which had been excluded from the auction. The bids that did come in from Americans were not always of a serious nature, with one individual bidding at the official price of $42.20 when the market price was closer to $200. In the end, only half the gold made available for auction was bid for and, of that, only 750 Koz. of the 2 Moz. offered were actually purchased.
“curiosity rather than investment”
There were several newspaper articles at that time searching for a reason to explain the lack of demand from the newly formed futures markets, the official auction, and the American public’s “lack of enthusiasm” for their returned right to own gold.
And they may have had a point. While the US market was uninterested in gold, the physical market in Europe for Krugerrands was booming – particularly in the UK. The UK government was becoming so concerned about the volume of domestic buying in January 1975 that questions were being asked in Parliament and ministers worried publicly that any attempt to forcibly purchase these coins to prop up sterling would fail as no one knew where they were held.
Prices bottomed in August 1976, down 50% from their peak, but gold demand was strengthening in the US. While the futures market was slow to start in 1974, by 1977, record volumes were being recorded in New York markets on a regular basis. A weak start didn’t mean that gold’s return to the American markets was a long-term failure, and no one can say what Bitcoin’s strong start in the US ETF markets will lead to.
