Dr. Fergal O'Connor,

By Dr. Fergal O'Connor,
Lecturer in Finance, Cork University Business School

The third instalment of Fergal’s academic analysis of the gold price which focuses on the years leading up to the start of World War II.

On Sunday, 20 September 1931, the UK Treasury announced that it had advised His Majesty’s Government to depart from the Gold Standard (Government, 1932). This action reinaugurated a free market for gold in London following six years on the Gold Standard. The London gold market would continue to operate (relatively) freely until 3 September 1939, as World War II broke out.

This eight-year period saw increased interest in gold from investors, with M. Eccles (1936) at the US Federal Reserve pointing to “private hoards” of gold being worth approximately $2 billion in total globally in 1936, which in today’s terms would be about $483 billion based on Economic Share. The Federal Reserve (1954) further reported that between 1931 and 1954 about $21 billion of gold had been purchased by private individuals, or $1.1 trillion in terms of modern Economic Share. The total value of gold held by private investors in 2018 came to approximately $1.69 trillion based on World Gold Council estimates – indicating that investors in the 1930s held gold in similar proportion to investors today.

Gold ownership during this period was always referred to as ‘hoarding’ whether by national authorities or the bullion banks themselves. Montagu’s Annual Bullion Letter in 1932 says that the London market gold price was not just set by reference to the US fixed gold price and the dollar-sterling exchange rate, but in fact, the London Fixings Gold Price frequently went above that price due to “Foreign enquiry for Hoarding”.

Where previously only one line had been available between all the participants each participant was provided with a phone

Harvey (2008) discusses the evolution of the form of the London Gold Fixing in detail since its 1919 inception and points to the 1930s market as being the period when it began to resemble what we would think of today as the Fixing. Telephones became commonly used during the Fixing. Where previously only one line had been available between all the participants, now as speculation caused prices to change more frequently, each participant was provided with a phone in order to be able to discuss the changes with their home office.

An investor’s view of gold in the 1930s

One major reason why I wanted to collect data from the 1930s was in order to examine whether the roles that gold plays in an investor’s portfolio today (as a diversifier and a safe haven) are the same as the roles it played before 1968. It is possible that gold’s current investment characteristics are a short-term phenomenon which might not continue going forward, if the conditions since 1968 were atypical. However, if gold acted in a similar way in the 1930s as it does today, this would make a strong case for gold to be included in investment portfolios going forward.

In order to assess gold’s long-term investment case, I have also collected the first published daily index of equity prices for the London market, The Financial News 30 (FN30) Equity Index, which was first published in 1930. Figure 1 on page 7 shows the changes in the values of both over this period in which gold floated freely. Gold outperformed equities significantly over the whole period for holders of both. The gold price increased 98% in total, with equity prices increasing 51%.