Gold And The Dollar

In order to compare gold with the dollar, we should consider the purchasing power of the first as a monetary asset and of the second as a printed currency. In doing so, we will see that the value of gold has remained more or less the same even for centuries, whereas the dollar has constantly devalued, being faced with increasing inflation levels.

Comparing just the prices of gold in dollars over time will not do, simply because gold, unlike the dollar, is also a commodity and, as such, its price is determined by the relation between demand and supply. Therefore, if its price is higher in US dollars, but equally higher in other major currencies, this means that the demand for gold is higher than the supply. On the other hand, if the gold price is higher only in US dollars, then its price may be indicative of a weakened dollar and a poor condition of the national economy. And here we are facing a vicious circle to the extent the obviously weakening dollar and the fears of inflation can contribute in their turn to an increasing demand for gold as a more stable asset and, therefore, to increasing its price. In conclusion, if seen as competing assets, when the dollar is stronger, people prefer the currency, while, when it is weaker, they turn to gold. This happens because of the century-long tradition and education of using money to purchase goods and services or to store wealth.

On the other hand, the dollar, as any other major currency, is no longer backed by gold, already in 1971 president Nixon abandoning the gold standard. While governments were obliged to be able to redeem notes by a certain amount of gold, their power to print money was checked. But with the abandonment of the gold standard, they could do as they pleased: printing as much money as they considered fit, having through central banks other manipulation levers at their disposal as well, such as interest rates, tax checks, etc. As such, the only genuine indicator of the real condition of the economy and currency were the inflation levels and accordingly the devaluation of currencies. And the devaluation of the US dollar is a fact, if we consider only the expectation to have a gold price of $2,000/oz in just two year-time. Or gold price rises only when people no longer perceive paper money as reliable.

The recession in the US, determined by the credit crisis, the bankruptcy of major banks and the collapse of whole industries, as well as by the huge debt all these plunged the country in is also expected to lead to the further devaluation of the dollar. In this context, gold (especially gold bullion bars) remains the only reliable asset to invest in. On the other hand, the increasing global gold demand (driven by the limited gold supply and the continuous economic growth and therefore consumption in countries like China and India), in spite of rising gold prices, may determine a further imbalance between the value of gold and that of the dollar.

Therefore, when there are so many objective developments to support your fear that the dollar will plunge and as many supporting your trust in gold, what can you do? Presumably, get rid of the first 'asset' and get as much you could of the latter.

Learn from professionals how to buy gold bullion bars in times of recession.