Gold has captivated humanity for ages. The ending of the gold standard created a lot of financial instability and inflation triggering successive stock market crashes at the start of the 21st century. A decade later, the price gold began to rise and people started talking abut the possibility and wisdom of returning to the gold standard. When we consider the finite nature of gold as well as the current global financial system, a return to the gold standard or the use of gold as currency seems impractical.
In a free market system, gold should be a currency. This is because it has a price and that price fluctuates in relation to other currencies like the U.S dollar, or the Euro, Pound sterling or any other form of exchange. This precious metal can be bought, stored or sold to many different gold dealers but it is not used as a direct payment method. Gold however, is very liquid and can be sold for cash with ease.
Gold behaves like currency in a lot of ways. For instance, the are times when the price of gold increases and times when other currencies outperform this precious yellow metal. Gold often does well when stocks are down and the behaviour of currencies point to wars and other disasters.
The U.S dollar and gold
There has always been an interesting relationship between gold and the U.S dollar. When the value of the U.S dollar declined, the price of gold rises. This happens over a long term. In the sort period, the relationship has broken down.
This relationship came about as a result of the Bretton Woods system. At the time, the U.S government made a promise to redeem international transactions made in dollars for gold. The Breton Woods system came to an end in 1971 but the U.S remained the global economic power. When gold is discussed, the U.S dollar ends up in the discussion too.
The problem with the gold standard is its reliance on central banks. These banks had to play by certain rules and the rules required these banks to change their discount rates and offer fixed exchange rates. This caused a lot of countries to devalue their currencies. The U.S continues to be a global economic powerhouse but a lot has changed over the years. The U.S Greenback has does not have as much power as it did before. Things are turning in global politics. A lot of countries are talking about dedollarisation. Last year central banks went on a gold buying spree prompting lots of speculation.
Knowing when to buy and sell is an important skill. There are times when owning gold is favourable but there are times when gold trends are unclear and you are not sure if you should sell or not then wait for things to be clear. The price of gold has been going up recently and everyone is eager to sell. If you need cash then sell. You can find many gold dealers that are eager to buy. It is wise to educate yourself so that you make an informed choice in the end.
