Technical University Munich Commodities as an Asset Class - risklab

2.1 The different Commodity Types
hold credible gold reserves to back their currency. 19 The system finally failed caused
by two major drawbacks:
1. The dollar was on the one hand the international reference currency but on the
other hand the currency of the USA. It therefore could change its monetary
policy without bearing any consequences. Indeed all countries involved in the
Bretton Woods Convention financed a part of the huge budged deficit the USA
had cumulated during the Vietnam War what was payed with printing new
money.
2. The creditability of the USA decreased drastic because Germany and France
changed their dollars into gold. At the end of the 1960th the gold reserves of
the USA had fallen around one third. 20
Finally US-President Richard Nixon abandoned the system in 1971. The last fixing
price before the ”gold window” was closed was 42.22 US dollar per troy ounce, and
to this price the United States officially valued its gold holdings. Figure 2.7 shows
the long term movements of the gold price and its free flow since 1971.
Figure 2.7: Gold Price Movements between 1960-2006
The newest study about the behavior of gold prices in an international environment
by [Levin Wright 2006] has pointed out the major drivers of gold prices in the
short and long run. For the first case, the authors named changes of the following
economic indicators to be statistically positively correlated with changes in the
gold price: US inflation, US inflation volatility and credit risk. On the other hand,
changes in the US dollar trade-weighted exchange rate, what reflects the value of
19 At this point in history the USA hold 70% of worldwide gold reserves. See [UBS research 2005].
20 See [UBS research 2005].
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