The gold window was an informal name for a two-tiered system of gold pricing. After the collapse of the London Gold Pool in March 1968, the U.S. and several other nations established a two-tier gold system. There was an official tier, in which central banks could buy and sell at the official price of $35 per ounce, and a private market, when gold was freely traded at market prices. The aim of the system was to prevent speculative profits from any rise in the official price of gold (there was a risk that the U.S. might devalue the dollar).
However, the two-tier system created an opportunity to exploit the gold window by converting currency reserves into gold and selling the metal in the gold markets at higher rates, which further deteriorated the U.S. balance-of-payments position. Therefore, on August 15, 1971, President Nixon abolished the direct convertibility of the United States dollar into gold. In a move known as the Nixon shock, he closed the gold window, de facto ending the Bretton Woods system. By closing the gold window, the last tie between gold and the world currencies was broken and the gold standard was fully abandoned. This resulted in the current global system of free-floating fiat currencies.
The U.S. dollar was fixed to gold until 1971 at a significantly overvalued exchange rate of $35 per ounce (given the mass printing of the greenback), and the value of gold increased substantially after the gold window was closed. It was an understandable reaction to a prolonged period when the dollar had been inflated and gold had been held at a fixed price. The price of gold was additionally supported by fears over the new monetary system based on freely fluctuating fiat currencies.
It is worth noting that our fiat money experiment has been here only since 1971. Thus, when the faith in it decreases, especially in the U.S. dollar, the unofficial world currency, gold prices rise. Contrary to paper currencies, gold is a real commodity which cannot be printed and has a certain use value, which sets a bottom for its prices – this explains why there is demand for it in times of distrust in the U.S. dollar system. You can think of gold (which used to be money for thousands for years) as an insurance or backup in case of the collapse of the fiat money economy with the greenback as the world reserve currency.
We encourage you to learn more about gold – not only about the history of the gold market, but also how to successfully use the shiny metal as an investment and how to profitably trade it. A great way to start is to sign up for our gold newsletter today. It's free and if you don't like it, you can easily unsubscribe.