The Relationship between Gold and The US Dollar
Although gold is one of the oldest forms of currency in the world, it hasn’t been used as a means of exchange for quite some time. Yet, the appeal of gold continues to grow.
As a lucrative commodity, gold has a substantial influence on the value and strength of major currencies around the world.
In addition, it’s one of the top investment avenues that provides excellent returns with minimal risk.
If you’re looking to invest in gold to make money, it’s a smart move to learn about the relationship between gold and the US dollar.
Here’s what you need to know.
The Gold Standard
For the longest time, gold was the commodity supporting national currencies. The government would print currency notes in relationship to gold which acted as a reserve currency.
It wasn’t until 1971 when President Nixon discontinued the gold standard. This gave economies the power to print legal tender ad nauseam.
Although the volatility of the US dollar has made many economists feel that it should return to the way it was.
Gold as a Hedge Against Inflation
Perhaps the best part of why gold continues to retain its position as a relatively risk-free investment option, it that it can hedge against inflation.
That’s one of the reasons why we see so many investors buying gold during periods of high inflation.
Since gold can’t be diluted, it is able to maintain its original value despite changes in US dollar values.
Even compared to thousands of years ago, a hypothetical gold IRA in private vault storage around then and now would have approximately the same value.
Gold and the US Dollar
The US Dollar and price of gold are strongly correlated because gold is dollar denominated. What this means is that the US Dollar is the monetary or cash unit that defines the price of gold at face value.
When the US Dollar changes in value, this impacts the price of gold in other currencies, which changes the demand for gold, and henceforth, the demand changes the price of gold.
So, for example, when the USD becomes weaker, the price of gold falls, and more people buy it.
Consequently, the price of gold concurrently also increases due to the high demand.
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