WHERE IS GOLD HEADED?

The news that gold is setting new records every day has lost its journalistic value. Gold, which was $2,625 per ounce at the beginning of the year, surpassed $3,900 in just nine months. It is unclear where it will stop. This situation reminded us of Emin Çölaşan's book, “Where is Yalçın Headed (Yalçın Nereye Koşuyor)?”, which tells the story of people who deposited their money with bankers in the 1980s to earn high interest income, and the subsequent collapse of the banking system. Could there be a collapse in gold as well? We decided to examine the history of gold's unstoppable rise and whether this situation will continue. Perhaps it was a bit excessive, but we anticipated that going back 100 years and fast-forwarding to the present would shed light on the future.

Unit of Measurement and Unit Price of Gold

The price reference for global markets is based on the ounce of gold. An ounce of gold consists of 1 troy ounce and weighs approximately 31.10 grams. It is referred to as XAU/USD, which represents the price of one ounce of gold in US dollars. We all agree that it makes more sense to use this unit of measurement when tracking the price of gold over the years, both because it is an internationally accepted unit of measurement and because it has a more consistent value compared to the Turkish lira.

The Fixed Value Period (1925–1971)

During the fixed value period, the price of gold per ounce remained a fixed value determined by government policies rather than market dynamics. Until 1934, the price of gold was fixed at USD 20.67 per ounce by the US government. The economic collapse during the Great Depression of 1929 shook confidence in the financial system and led to a large outflow of gold from the US Federal Reserve. This situation fundamentally changed the financial authorities' approach to gold.In 1934, US President Franklin D. Roosevelt's decision to raise the price of gold from USD 20.67 to USD 35 revealed the reality that the value of gold was determined not by the market but by the central government's monetary policies. This price increase devalued the dollar, aiming to increase the Federal Reserve's declining gold reserves and further solidify the role of gold in the international monetary system.

The 1944 Bretton Woods Agreement established that the dollar would be the only currency convertible into gold, with other currencies pegged to the dollar. As a result of the agreement, the US dollar was fixed at USD 35 per ounce, ensuring that world currencies were indexed to the dollar. This system brought stability to the post-World War II international financial system. Although gold remains an important asset in the reserves of many countries, most countries prefer to settle their international balances in US dollars rather than mobilizing their gold reserves, as per Bretton Woods. This preference paved the way for the US Dollar's dominance in international trade and financial markets. Thus, although the Bretton Woods System declared gold to be the focus of the international monetary system, in practice, it limited gold's active role and caused its price to be capped at an artificial ceiling.

The Onset of the Rise  (1971-1980)

In 1971, US President Richard Nixon unilaterally ended the direct convertibility of the US dollar into gold. This decision effectively led to the collapse of the Bretton Woods System and eliminated the last official link that fixed the price of gold.

By allowing market forces to determine the price of gold, this decision made gold a true hedge against inflation and currency devaluation for the first time. The 1970s went down in history as a period marked by high inflation, high unemployment, and economic stagnation (stagflation) in the United States. Geopolitical events such as the 1973 and 1979 Oil Crises further increased inflationary pressures. In this environment, gold prices soared from around USD 35/ounce in 1971 to USD 850/ounce in 1980. This represents a dramatic nominal increase of over 2,300 percent within a decade.Similarly, in Türkiye, the price of gold per gram surged 23-fold between 1971 and 1979. The tendency of gold to preserve value attracted investors facing losses in the purchasing power of their currencies, triggering an unprecedented nominal increase in the price of gold per ounce. This period is the most important period historically that confirms the thesis that gold provides a strong hedge against inflation.

Years of Stagnation and Decline (1980-2000)

In the early 1980s, the Federal Reserve aggressively raised interest rates to combat double-digit inflation. These policies brought inflation under control but also put significant pressure on gold prices. High interest rates made gold unattractive as it offered no interest income, while other financial assets, such as interest-bearing bonds, became more appealing.In contrast to the strong positive correlation observed in the 1970s, the decline in gold prices during the 1980s despite high inflation demonstrates that the relationship between gold and inflation is neither straightforward nor unidirectional. Market analyses have revealed that the main factor affecting the price of gold is not nominal interest rates, but inflation-adjusted real interest rates. As inflation was brought under control, gold prices began to decline from their high point in 1980. Gold fell by an average of 10% annually between 1980 and 1984, reaching a 20-year low of USD 251.95 per ounce in 1999. Central banks also became net sellers of gold during this period, increasing the pressure on prices.

Safe Haven (2000–2025)

In 2000, the significant decline in the value of technology company stocks and increasing geopolitical uncertainties drove investors away from risky technology stocks and toward gold. With this shift, the price of gold per ounce entered a steady upward trend starting in 2002.

Gold's role as a safe haven was undeniably proven during the 2008 Global Financial Crisis. The crisis caused a major shock to the global economy, leading to declines in GDP and stock market crashes. During this period, as confidence in traditional financial assets waned, the price of gold per ounce rose from USD 859 in 2008 to a record high of over USD 1,900 in 2011. This demonstrates that gold serves not only as a hedge against inflation but also as an insurance against risks to the integrity of the financial system.The COVID-19 pandemic and global monetary expansion in recent years have pushed gold prices to new highs in 2020. This upward trend has been reinforced by geopolitical tensions such as the Russia-Ukraine war, leading to record highs for gold per ounce in the 2024-2025 period. Surpassing USD 3,500 in April 2025, it also exceeded the inflation-adjusted peak of 1980. This demonstrates that gold today responds not only to current market conditions but also to forward-looking expectations.

Nominal and Real Gold Prices

The graph below shows the nominal and real price movements of gold based on the 2024 US dollar exchange rate. The yellow line shows the nominal price of gold per ounce, while the green line shows the annual average of inflation-adjusted prices.

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