Gold vs. The Dollar: The Fight of the Century

For thousands of years gold was money. Whether it took the form of coins used for transacting business, or bars used as stores of wealth, gold was the ultimate monetary asset. Paper currencies came and went over the millennia, as did subsidiary coinage made from silver, copper, or whatever metals struck rulers’ fancy. Through all of that, gold remained a constant.

The golden age of the classical 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 as war began in 1914, belligerent countries realized that the gold standard inhibited their ability to finance the fighting, and so the gold standard was unceremoniously done away with.

A gold exchange standard was established after World War I, but it failed miserably, and it wasn’t until after the Great Depression and World War II that the international monetary system began to return to any sort of stable footing.

By that time the US dollar had become the world’s dominant currency, and its residual gold backing gave the dollar an aura of stability. While US citizens were forbidden from owning gold, foreign nations could redeem their dollars for gold at the US Treasury’s gold window.

Most nations didn’t bother taking advantage of this privilege, at least not until the US government began taking advantage of the dollar’s position as the world’s primary reserve currency to create more dollars than it had gold backing for. European national began to wise up, and gold began to flow out of the United States.

Rather than risk a complete depletion of US gold holdings, President Nixon closed the gold window in 1971, removing the last official link between the dollar and gold. Since that time, gold and the dollar have been freely floating on international markets.

While many economists at the time thought that severing the dollar’s relationship with gold would consign gold to the dustbin of history, the “barbarous relic” did just the 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.

Their Track Records

Rather than weakening gold, the closure of the gold window in 1971 strengthened the yellow metal and weakened the dollar. No longer bound by the strictures of gold redemption, the Federal Reserve was now able to create money ad infinitum. The results, as we all know, have been 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 gold?

Gold has gained nearly 5,300% in value since 1971, when it was officially valued by the US government at $35 an ounce. That’s an astounding rate of increase, over 8% per year annualized, and even exceeds the growth of stock markets over that same period of time.

As you can see, as the dollar weakens, gold strengthens. And the weaker the dollar gets, the stronger gold gets.

Gold vs. the Dollar Today

That dynamic plays out not just over the long term but in the short term too. Many people are wondering why, when the economy is showing signs of weakness, inflation remains high, and recession seems just around the corner, the gold price isn’t shooting to the moon.

That’s because gold is once again competing directly against the dollar. Watch the movements in the gold price and you’ll often see that they’re negatively correlated to moves in the US dollar index.

When the dollar index rises (dollars gets stronger), the gold price often drops. When the dollar index falls, the gold price often rises.

Institutional investors are looking at the Federal Reserve’s current plan to continue hiking interest rates and cut the size of its balance sheet and are judging that this will help strengthen the dollar. And consequently, they’re judging that this will put downward pressure on the gold price.

The longer the Fed sticks to its tightening policy, the greater the pressure keeping the gold price from rising, or at least so conventional thinking goes. At some point, however, the economy could get so bad that consumer demand for gold will completely overwhelm any downward pressure placed on gold from the Fed’s monetary tightening.

There’s also the fact that, despite the Fed’s supposed tightening, the Fed’s balance sheet and the size of the money supply will still be far larger than they were just a few years ago. So while the dollar may be strengthening in the short term, it’s still weaker than it was a few years ago.

The Fed will also be under a lot of pressure to discontinue its tightening policy if the economy falls into recession. And the more severe the recession, the greater the pressure to revert to monetary easing.

This dynamic will likely influence the short-term direction of the gold price, with the tension between the dollar and gold providing much of the backdrop for movement in the gold price. And over the long term, the tension between the dollar and gold could continue to be a major influence on the gold price.

Gold vs. the Dollar in the Future

Depending on how severe the next recession is, we could be at a crossroads right now, one in which the future direction of the monetary system becomes more apparent. Gold and the dollar have been fighting each other for over a century, with the US government throwing its weight behind the dollar, while markets continue to trust in gold.

If the inflationary crisis we’re currently experiencing devolves into stagflation, trust 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 outlasted currency after currency over thousands of years. That’s why so many people choose to buy gold, because of its long-term track record of stability and wealth preservation. It’s also a useful tool to diversify a portfolio, especially as inflation rises and recession nears.

The fight between gold and the dollar won’t be over anytime soon. But at some point many Americans may have to pick a side in the future if they want to maintain their standard of living.

Whether portfolio diversification, hedging against inflation, or protecting against financial turmoil, Goldco has worked for over a decade to help Americans reap the many benefits of buying and owning gold. Thousands of satisfied customers have trusted Goldco to help them preserve their wealth and safeguard their retirement savings. Will you too?

Call Goldco today and talk with one of our precious metals experts to learn more about how you can benefit from owning gold.