Gold: It’s All About the U.S. Dollar

The relationship between gold and the US dollar is similar to that between bonds and interest rates.  Gold and the US dollar move inversely.  So do bonds and interest rates.

If you own bonds, then you know that if interest rates are rising, the value of your bonds is declining.  And, conversely, if interest rates are declining, the value of your bonds is rising.  One does not ’cause’ the other.  Either result is the actual inverse of the other.

When you were a kid you probably rode on a see-saw or teeter-totter at some time.  When you are on the ground, someone on the other end of the see-saw is up in the air.  And, vice-versa, when you are up in the air, the other person is on the ground.  Again, one does not ’cause’ the other.   Either position is the inverse of the other.

Gold is stable.  It is constant.  And it is real money.  Since gold is priced in US dollars and since the US dollar is in a state of perpetual decline, the US dollar price of gold will continue to rise over time. There are ongoing subjective, changing valuations of the US dollar from time-to-time and these changing valuations show up in the constantly fluctuating value of gold in US dollars.  But in the end, what really matters is what you can buy with your dollars which, over time, is less and less.  Remember, the US dollar has lost ninety-eight percent of its purchasing power over the last one hundred years.  And over that same one hundred years, what you can  buy with an ounce of gold remains stable, or better.  (See my article  A Loaf Of Bread, A Gallon Of Gas, An Ounce Of Gold)

Gold’s value is not determined by world events, political turmoil, or industrial demand.  The only thing that you need to know in order to understand and appreciate gold for what it is, is to know and understand what is happening to the US dollar.

And what is happening to the US dollar?  It is in a constant state of deterioration, punctuated with periods of relative stability.  This is reflected directly in the US dollar price of gold.

The value of gold as priced in US dollars is a direct reflection of the value of the US Dollar.  Remember, gold is the constant.  The value of the US dollar is continually declining over time but always fluctuating (both up and down).

From my article Gold Is Real Money :

The Federal Reserve Bank of the United States was established in 1913. At that time the U.S. dollar was fully convertible into gold at a rate of twenty ($20.65) dollars to the ounce. You could exchange paper currency of twenty dollars for one ounce of gold in coin form. The coins were minted by the U.S. government. Gold in other forms (dust, flakes, nuggets, etc) also had circulated as money at the same ratio of twenty dollars to the ounce once its purity and weight was established. Fast forward one hundred years. The U.S. dollar has lost 98% of its purchasing power over the last century. In other words, it takes fifty times as many dollars to buy today what one dollar would buy a hundred years ago. Whereas one ounce of gold will still buy today what it would a hundred years ago.

 

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