Dollars and Anti-Dollars
The price of gold has reached a 27-year high. So why is it so high?
Today’s topic is dollars and anti-dollars.After last week’s episode about how banks make money, a listener named Karl told me about an educational video by Paul Grignon called “Money as Debt.” It’s an animated film that runs a little over 45 minutes and it provides an excellent explanation of where money comes from, the central banking system, and the implications of fractional reserve banking. Here’s a link to this video. I’ve also posted a link to Paul’s website, at the bottom of this page, where you can get the video on DVD. It’s well worth watching!
And now on to our topic.
Last week, the price of gold reached a 27-year high. So why is it so high? What’s up with the price of gold?
Why Is Gold Going Up?
The price of gold tends to go up when the value of the dollar goes down and vice versa. This relationship is the reason that gold has been called the “anti-dollar.” Gold offers protection against inflation and is considered to be a safe store of wealth during times of currency devaluation. When individual as well as institutional investors are worried about the value of the dollar going down, they tend to invest more of their money in gold. So, the demand for gold goes up when confidence in the U.S. dollar goes down.
The price of gold has been going up because the dollar has been losing value. The Federal Reserve has issued vast quantities of money and this increase in the money supply has led to fears about inflation and a declining dollar.
The Dollar Is Going Down
To see how the value of the dollar has dropped, check out this link to a graph of the dollar index.This index tracks the value of the U.S. dollar in relation to other currencies. I’ve also posted a link to another graph that shows the value of the dollar from 1997 through 2007 measured in milligrams of gold. Both of these graphs show that the value of the dollar has been declining since 2001.
The U.S. dollar, like paper money around the world, is what’s called a fiat currency, which means that it’s backed by faith rather than by something physical of value, such as gold. A listener in the U.S. named Chris H. and Catherine in Salt Lake City both e-mailed me asking whether it makes sense to save money in euros or Canadian dollars, which are holding their value better than the U.S. dollar. These currencies, however, are also fiat currencies and, over time, they too may lose value as their central banks print more money.
Gold Is a Store of Value
Rather than saving in other currencies, you might want to keep a portion of savings in hard assets, such as gold, other precious metals, oil, and real estate. Gold is unique in that it is viewed by people everywhere as a store of value, and can be used to protect wealth during times when a currency is losing value. Unlike other types of investments like stocks and bonds, gold does not depend on the performance of a particular person, company, or institution for its value.
Today, I’m giving away the book The ABCs of Gold Investing by Michael Kosares. This book explains why and how to invest a portion of your savings in gold. And the winner is Bryan in Naperville, IL. Congratulations, Bryan, and be sure to check your e-mail for instructions.
Stay tuned, because we’re going to be looking at gold in depth in the next few episodes. Next week we’ll look at the gold standard to understand its value, and after that I’ll give you some hot tips on investing in gold.
- Money as Debt video by Paul Grignon
- Money as Debt website and DVD
- Graph of the U.S. Dollar Index
- Graph of the US Dollar Measured in Gold
Dollar image courtesy of Shutterstock