Because we have been dealing in gold coins for about 40 years, we can often draw on previous experience, and can easily remember the exciting days when the USA had to sever the tie between gold and the dollar, allowing gold to start its meteoric rise from $35 per ounce to a peak of $850.
We can also try to work out why gold overshot its eventual price by so much.

Booms & Busts
Almost every commodity has experienced at least one boom, when its price has rocketed above its true value. It was once tulips, then South Sea shares, Poseidon gold mining shares, dotcoms, Marconi, Enron. The list would be almost endless. It could be stated with mathematical accuracy that every major price change will be followed by a correction, i.e. a movement in the opposite direction. We used to read one financial column which stated that most major price changes are followed by a correction of between one third and two thirds. This is only a general observation and not a matter of fact, but nevertheless most major price changes do follow this sort of pattern. Historically, the price of gold has always been stable, at least until the last century, so why did it suddenly change?

Gold & Currencies
From the beginning of coins and money, almost all currencies have been based on the value of gold or silver. In societies and countries where all money was made of gold, there could be no devaluation of the currency, only fluctuations in the prices of individual commodities. Stable currency values could only be affected by major long term supply changes in the amount of gold mined, although changing populations could also affect the demand for money. Once "fiat" money had been invented, it became worth what a consensus of people thought it was worth. "Fiat money" is money which has a value which is not represented by its intrinsic metal content. It also became easy for governments to issue more money than they held in reserves. We will skip some of the detail here, otherwise we could end up discussing the causes and effects of inflation, the merits of the gold standard, the silver standard, bimetallism, and other esoteric economic concepts. We will jump to the time of the first world war, and the first big increase in the price of gold.

1914 - 1918 World War I
We do not fully understand why, but at around the time of the first world war, almost every currency in the world became devalued. Perhaps conducting war puts such a drain on the resources of a country that it ends up in debt, or having to melt down and sell its coins to pay its way. However you try to explain it, from the onset of this war, most states stopped minting coins made of gold and silver, and in many cases the old gold and silver coins disappeared from circulation within a few years. Some states reduced the precious metal content of its coins, Britain changed its silver coins from 92.5% to 50% silver in 1920, and to 0% in 1947, notably just after the second world war. The production of gold sovereigns in London slowed down sharply after 1914, and had stopped completely by 1917, although production by the branch mints outside the UK continued until 1932.
The price of gold rose from about £4 per ounce before 1914 to between £12 and £15 per ounce by about 1967. A major step along the way was the fixing of gold at $35 US per ounce in 1935.

The Dollar and Gold
In 1934 or 1935, the USA fixed the price of gold at $35 per ounce. This was done not to stabilise the price of gold against the dollar, but the opposite, to stabilise the value of the dollar because it had a fixed exchange rate for gold. This was done to restore confidence in the dollar and the US economy after the 1929 share collapse and the depresion of the 1930's. It appears to have worked, because the USA, with its almighty dollar, became the powerhouse of world trade, and the richest nation on earth.
Most good things come to an end, though, and by about 1967, most of the world did not believe the dollar was still worth 1/35th of an ounce of gold, or put another way, they believed that gold was worth more than $35 per ounce. This was probably because the US Treasury had issued more gold than it possessed in reserves, but for whatever reason, if enough people share a belief, then it can become a self-fulfilling prophecy. Eventually the US Treasury had to admit defeat and bring a halt to convertibility.

The Two Tier System
When the USA called a halt to convertibility, it did so reluctantly, and in a limited fashion. It decided to try to operate a 2-tier market, where it guaranteed convertibility (at $35) for international settlements with other national banks, but at a higher price ($42?) for private individuals. This two tier system lasted for only a brief time, perhaps six months, before the weight of bets by rest of the world forced the US government to abandon it completely and allow gold to float, or should that have been "the dollar to sink". The rest is history. When the price of a commodity is artificially pegged for a significant length of time, it market price becomes significantly out of line with its true market value. I can remember media reports at the time saying that gold could even double or treble in price. While we thought this was extreme, it proved in fact to be very conservative.

The Bubble
Gold eventually peaked in 1974 at $850, or more than 24 times its previous price, although it subsequently bottomed out at about $250 in 1999.
Quite why it hit so high a peak, we will never completely understand. The only explanation seems to be mass hysteria. Once gold, the most stable of commodities throughout all its known history, started to rise, it started to hit the news. Almost everyone wants to jump onto a successful bandwagon, and so almost everyone started to buy gold. Night after night, the TV news would report that gold had hit yet another record high price, and the following day even more people would buy gold. In this way gold got caught up in a spiral where media reports of yet another record price inspired even more people to jump in and buy, causing yet another record high price, followed by more media comment. All such bubbles burst, but nobody ever knows precisely when the peak will be reached, and most people want to stay on for the ride until the end, then fall asleep and miss the terminus. (Sorry about the metaphors).

Demand in Perspective
We got to thinking recently about our company, and its market in the late 1960's and early 1970's compared with today. In those days, although we were one of the biggest bullion dealers in the UK, we were mainly a local company, and we reckon that about 80% of our business came from an area within about a 20 mile radius. The Fylde Coast contains about 250,000 population. The whole UK has a population about 240 times greater, and probably with a higher average wealth. Nowadays, thanks to the internet, over 80% of our business comes from outside a 20 mile radius. We can remember one day in 1971 when we sold 508 krugerrands in one day, and probably a similar number of sovereigns. The krugerrands alone would have a present day value of about £120,000. While we now frequently exceed this figure, we wondered what out daily sales would hit now if the whole UK were to start buying gold at the same rate as the Fylde Coast did in 1971. Our conclusion is about 120,000 in one day, with a market value of about £30 million. We also reckon we would need over 100 dealing staff to transact that level of business. If we ever get to the point where we are selling half that volume, we will know we are caught up in another price-demand stampede, and start expecting the bubble to burst. Hopefully because gold has "bubbled" once before, it may never happen again.