Trevor Gerszt: Gold versus the Dollar: The Fight of the Century
For thousands of years, gold was money. Whether it took the form of coins used for commercial transactions or bullion used as stores of wealth, gold was the ultimate monetary asset. Paper currencies came and went over the millennia, as did subsidiary coins made of silver, copper, or whatever metal the rulers liked. Through it all, gold has remained a constant.
The golden age of the classic gold standard lasted only about a century, from the early 1800s to the early days of World War I. Its peak coincided with some of the greatest advances in productivity and living standards the world has ever seen. But when the war started in 1914, the warring countries realized that the gold standard was inhibiting their ability to finance fighting, and so the gold standard was unceremoniously abolished.
A gold exchange standard was established after World War I, but it failed miserably, and it was not until after the Great Depression and World War II that the international monetary system began to regain a stable footing.
By then, the US dollar had become the dominant currency in the world, and its residual support in gold gave the dollar an aura of stability. While U.S. citizens were prohibited from owning gold, foreign nations could exchange their dollars for gold at the U.S. Treasury Gold Window.
Most nations didn’t bother to take advantage of this privilege, at least until the US government began to take advantage of the dollar’s position as the world’s primary reserve currency to create more dollars than he had no gold. European nationals started to take notice and gold started flowing out of the United States.
Rather than risk a complete depletion of American gold reserves, President Nixon closed the golden window in 1971, removing the last official link between the dollar and gold. Since then, gold and the dollar have been floating freely in international markets.
While many economists believed at the time that severing the relationship between the dollar and gold would relegate gold to the dustbin of history, the “barbaric relic” did the exact opposite. In many ways, gold is now stronger than ever, and in the long run it could end up reasserting its position as the world’s primary monetary metal.
Rather than weakening gold, the closing of the gold window in 1971 strengthened the yellow metal and weakened the dollar. No longer bound by restrictions on the redemption of gold, the Federal Reserve was now able to create money ad infinitum. The results, as we all know, were atrocious.
Since August 1971, the dollar has lost 86% of its value. In other words, it takes more than $7 today to buy what $1 did back then. And the gold?
Gold has gained nearly 5,300% in value since 1971, when it was officially valued by the US government at $35 an ounce. This is a staggering rate of growth, exceeding 8% per year annualized, and even exceeding the growth of stock markets over the same period.
As you can see, as the dollar weakens, gold strengthens. And the weaker the dollar, the stronger gold becomes.
Gold versus the dollar today
This dynamic plays out not only in the long term, but also in the short term. Many people wonder why, when the economy is showing signs of weakness, inflation remains high and a recession seems imminent, the price of gold is not soaring to the moon.
This is because gold is once again in direct competition with the dollar. Observe the movements of the price of gold and you will often see that they are negatively correlated with movements of the US dollar index.
When the dollar index rises (the dollar strengthens), the price of gold often falls. When the dollar index goes down, the price of gold often goes up.
Institutional investors are looking at the Federal Reserve’s current plan to continue raising interest rates and shrinking the size of its balance sheet and believe it will help strengthen the dollar. And therefore, they judge that it will put downward pressure on the price of gold.
The longer the Fed sticks to its tightening policy, the more pressure keeps the price of gold from rising, or so conventional thinking does. At some point, however, the economy could get so bad that consumer demand for gold will completely overwhelm any downward pressure on gold from Fed monetary tightening.
There’s also the fact that, despite so-called Fed tightening, the Fed’s balance sheet and the size of the money supply will still be much larger than they were just a few years ago. So while the dollar may strengthen in the short term, it is still weaker than it was a few years ago.
The Fed will also come under heavy pressure to end its tightening policy if the economy falls into recession. And the more severe the recession, the greater the pressure to return to monetary easing.
This dynamic will likely influence the near-term direction of the gold price, with the tension between the dollar and gold providing much of the backdrop for gold price action. And in the long term, the tension between the dollar and gold could continue to have a major influence on the price of gold.
Gold against the dollar in the future
Depending on the severity of the next recession, we could find ourselves at a crossroads right now, where the future direction of the monetary system becomes more apparent. Gold and the dollar have been battling each other for over a century, with the US government backing the dollar, while markets continue to trust gold.
If the inflationary crisis we are currently experiencing turns into stagflation, confidence in the dollar could continue to erode and gold could regain its status as the guarantor of international monetary stability. The question for you is, which side do you take?
Gold has survived currency after currency for thousands of years. This is why so many people choose to buy gold, due to its long-term track record of stability and wealth preservation. It is also a useful tool for diversifying a portfolio, especially when inflation is rising and recession is approaching.
The struggle between gold and the dollar will not be over anytime soon. But at some point, many Americans may have to choose a side in the future if they want to maintain their standard of living.
Whether it’s portfolio diversification, inflation hedging, or financial turmoil protection, Goldco has worked for more than a decade to help Americans reap the many benefits of buying and owning. Golden. Thousands of satisfied customers have trusted Goldco to help them preserve their wealth and protect their retirement savings. Will you do it too?
Call Goldco Today and chat with one of our precious metals experts to learn more about the benefits you can derive from owning gold.
Trevor Gerszt is the founder and CEO of goldco, a precious metals dealer in Los Angeles. For more than 20 years, Trevor has sought ways to help people build long-term wealth through the safety and stability of precious metals and other alternative assets. Goldco is A+ rated by the Better Business Bureau, 5 time INC 500 winner and has countless 5 star reviews for its quality customer service, reliability and strong reputation.
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