Gold Versus Dollar
Gold and the U.S. Dollar have quite the relationship. Normally, when the dollar is doing well, and is trading up and above its international counterparts, investors rush to further invest in the dollar, and will sell gold. When the opposite occurs, and the value of the dollar is decreasing, investors get scared, sell dollars, and invest in the typically strong and less volatile gold.
People buy gold for different reasons, but the main reason is usually that gold is a strong investment, with a history of good performance and relative safety. Also, because the price of gold is somewhat controlled by the central banks, it is less volatile, and subject to quick panic selling the way the dollar is.
In the 1970’s, the world’s monetary system was in turmoil due to the value of the dollar decreasing, and the hyperinflation that soon followed. When this happened, the value of gold increased, since investors saw it as a safe place to invest. After all, paper money, especially in a time of economic and monetary crisis, could end up being worth less than the paper it is printed on. Gold on the other hand even though it is subject to price volatility, will always be worth something because after all, it is gold. Many people feel that is it not only possible to experience another global monetary crisis, but that it is very likely, and some people even feel that it is inevitable. Once again, a massive decline in the value of the dollar will find the value of gold increasing. People generally buy gold when they are fearful, and when they are afraid.
Gold is seen as a good investment during times of inflation, or as a way to hedge your investment in the dollar. Inflation is defined as an increase in the money supply. When the United States government prints more money, it is decreasing the value of the money that is already in circulation. For the past few decades, we have faced consistent inflation of approximately 10-15% per year, which is one of the reasons that gold is experiencing such record highs, and the dollar is trading so low.
This inverse relationship between the dollar and gold began back in 1971, when President Nixon ended the use of the gold standard, and dollars were no longer convertible into gold. U.S. Currency was now true fiat currency, having no intrinsic value, and being backed by the faith of the United States Government. Gold was value at $35 per ounce in 1971, and its value had risen to a high of $800 in the next decade.
The value of gold has always stayed strong, whereas the value of the dollar has been extremely volatile. Currently, the top two economic superpowers of the world are China and India. Both of these countries have long been known to hoard large amounts of gold. Could this be a coincidence? Both the Chinese and the Indians have always held on to gold as a way of personal saving. By keeping their investments and savings in gold, they might not have had many quick increases that found them with a great deal of money, like many Americans experienced over the economic booms we have experienced. However, when faced with a global economic crisis, it is the people who invested in gold that are on top.