The value of the dollar relative to the value of gold. As the dollar loses value, gold gains value. Why is this the case?
In: Economics
Since the money loses value, its purchasing power goes down. This means you can purchase less for the same $ amount. Thus, when the dollar is worth less, you need to spend more of it to buy the same amount of gold.
Gold and precious metals are considered very safe investments and an alternative in a down market. So when things are bad, people buy gold. When things are good, they sell that gold and go to other investments.
It gives a pretty simple function: Dollar down, buy gold to compensate. Dollar up, sell your gold, times are good.
There are 2 things at play here:
The value you’re seeing is gold as valued in US dollars. So even if the ‘value’ of gold was staying the same, if the US dollar is falling, then the price of gold goes up, since dollars are now worth less.
But also, people buy gold as a hedge against the falling dollar. So the value of gold tends to go up as the dollar loses purchasing power since more people are buying.
The dollar and gold’s value are not directly linked. The US hasn’t been using a gold standard since 1933 and no country in the world uses it at this point. However, people still view gold as a reliable investment to store value.
That is the key idea that can explain why the dollar going down would increase the value of gold. People who are nervous about the value of the dollar may decide to keep some of their savings in the form of gold. For example a paranoid “prepper” who thinks some massive disaster is coming that will end all utilities, destroy law and order, turn the world into Mad Max, etc. is likely to keep a stash of gold in their bunker alongside their firearms and canned food. If the dollar goes down in value they pivot to buying more gold out of fear, driving up the price of gold.
Gold is valued because it is unchanging. There’s a very finite amount of it on Earth and it doesn’t decompose or corrode. That makes the value of gold rather predictable and stable.
The dollar is tied to the economy. In times of prosperity, the economy thrives. There’s a lot of money to be made of all the industriousness. In times of trouble, the economy can lose you a lot of money as uncertainty strikes.
That means that when things are going well, gold really isn’t all that interesting. You’re better off investing your money in the economy to profit off of everything that’s going on.
But when disaster strikes, war breaks out or something else goes wrong, the economy becomes a very uncertain bet. And investors don’t like uncertainty. When the economy looks scary to invest in, gold starts to look much better. It won’t earn you much money but it won’t devalue your money as the economy tanks either.
So the dollar doesn’t really have an inverse relationship with the value of gold. Gold has an inverse relationship with the state of the economy. And the dollar is tied to that same state of the economy.
Latest Answers