subject: Gold – Dollar Relationship [print this page] President Nixon abolished the gold standard in 1971 and in 1973 the IMF officially abolished gold as part of the monetary system. Still almost 40 years later gold seems to follow the U.S dollar more than anything else. Traditionally gold seems to move up as the Dollar goes down but recently this pattern has been broken since gold has been going up along with the Dollar. What this actually means is a difficult question to answer but most market analysts believe that gold is acting more and more like a currency. As almost all of the main fiat currencies (Dollar, Euro and Yen) are losing their value, investors need to diversify their portfolio to protect their wealth.
Behind the scenes there is even more confusion about the state of the Dollar and what will happen in the future. Since 2001 the Dollar has lost 30% of its value and since the creation of the FED it has lost 96% of its value. Being the most common reserve currency in the world the value of the Dollar should be relatively stable or at least that is what the investors are hoping.
The largest financiers of America, such as China, have started to move their reserves away from the Dollar and this is creating problems for the FED since no one wants to buy government treasuries. The FED is now forced to buy the treasuries itself and this leaves money bouncing between banks and the government. The banks benefit from this since they get easy money from FED to fill the holes in their balance sheets created by the Credit Crunch. Buying government bonds with the money is way more profitable than lending the money to general public since bonds create around 3% return compared to 1% coming back from loans. This creates a lack of physical money in the economy and slows down the recovery since people can't get loans from the banks.
The national debt of US stands at $14 trillion and will soon reach 100% of its GDP. With high unemployment rates and slowing economic growth the government is struggling to fund this debt. As a result the FED will keep printing more Dollars, which will decrease the value of the Dollar even more and drive investors to buy more steady assets, such as gold bullion.
On top of the problems with the Dollar, there is an issue with US gold reserves. According to the government, the USA holds about 8.000 tonnes of gold in Fort Knox but there hasn't been an independent audit of the gold since 1953. It is known that after the 1953, millions of ounces of gold have been sold outside the US but no official figure has been released regarding the current gold deposit. There is a good reason for that since if the US gold reserves are considerably smaller than expected, one can only imagine how deep the Dollar would dive.
The next few months will show what direction the US economy will take since after Labour Day on 6th September the holiday season ends and all the big players come back from their summer break.
We believe that gold investments will keep producing good and secure returns for investors as the growing retail and investment demand from east and west is likely to keep pushing the price towards new records later this year.
