Gold’s Relationship with the U.S. Dollar

Gold’s Relationship with the U.S. Dollar

The relationship between physical gold and U.S. currency is a long and complicated one. What the future holds for this relationship is anyone’s best guess because no investor has a crystal ball. By understanding how gold and the dollar have clashed historically, however, we can get a much better idea of how these two assets could interact in the near future.  These are the types of factors that control gold prices in the commodities markets, so it is important to have a firm understanding of these trends before you choose to make any investment decisions.

Original U.S. Currency

After the colonies joined the Union, a stand currency began to circulate instead of multiple currencies based on each colony’s assets and individuals values. U.S. dollars were originally minted as gold coins like the Eagle, Liberty Head and Indian coins, but it wasn’t too long before the government began printing “government and gold-backed” paper dollars in 1862.

The Gold Standard

The Gold Standard connected physical gold with U.S. dollars by guaranteeing the rest of the world that each dollar printed was fully backed by a dollar’s worth of gold. Richard Nixon removed the United States from the Gold Standard when he was President, and that gave the Federal Reserve relative autonomy to create as much paper “money” as it deemed necessary.

Gold Confiscation

The Gold Standard mentioned above was only possible due to an executive order issued by Franklin D. Roosevelt in 1933. Roosevelt decreed that citizens needed to turn their gold bullion, coins and certificates over to the government in exchange for $20 (the accepted gold price at the time) in cash. The government then raised the gold spot price artificially to restore confidence in the U.S. economy and to make paper dollars more attractive around the world.

Modern-Day Gold Price Fluctuation in Relation to the U.S. Dollar

The U.S. Dollar Index has a huge influence on gold prices today. The USDI shows the true value of an American dollar in relation to a basket of other currencies around the world. A lower USDI is beneficial for gold prices, and vice versa. This is true because when the dollar is worth less it means you need more dollars to purchase the same amount of gold.

Conclusion: What’s next for gold in relation to U.S. currency?

This is a tricky question to answer because so many variables are involved. Will the Federal Reserve raise interest rates? Will the government decide to confiscate gold again? There’s no crystal ball that can tell us what will happen to gold next in terms of its relationship with the U.S. economy, but we can be sure of one thing – civilizations have valued gold as money for thousands of years, and there is no indication that the greenback is going to change that tradition.

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