Gold has been the currency of choice throughout history. Dating back to the year 643 B.C., in Lydia, which is present-day Turkey, gold was used to make coins. Historically, the market value of a coin was based entirely on the market value of the metal that it was made of.
Throughout history, explorers accumulated gold with the intention of determining who was the wealthiest between them all as such explorers traveled to Spain, Portugal, England, and, eventually, what would become the United States.
Understanding this history is important, as it led to what eventually became the Gold Standard Act. The Gold Standard Act guaranteed that various governments would redeem paper money for its market value in gold.
Gold and the U.S. Dollar after WWI and WWII
In the United States, the Gold Standard was introduced in 1834 and eventually ended in the early 1970s. While it was successful for decades, the economic impact of WWI, WWII, and the Great Depression impacted global currencies, along with the relationship between the U.S. dollar and gold.
During the 1960s, Americans were showing signs of purchasing more and more imported goods, with foreign dollar holdings greatly exceeding that of gold within the United States. With markets becoming more and more global in nature, Americans were trading in their dollars for the determined market value of gold, which created strain on the U.S. financial system. The gold standard officially ended on August 15, 1971, when President Richard Nixon changed the dollar and gold relationship, no longer allowing the Federal Reserve to redeem dollars with gold.
The Current Relationship Between the U.S. Dollar and Gold
While the Gold Standard Act was disbanded by President Nixon, the relationship between the U.S. dollar and gold remained. Analysis from U.S. Money Reserve suggests that the dollar may fall soon. With this information, should the dollar weaken, U.S. Money Reserve points to a pattern that suggests that the index could decline to the lows seen early last year. The relationship between the dollar and gold is historically inverse, in that it suggests that if the dollar increases, gold could rise.
For buyers, it might be interesting to watch the moves made by the Federal Reserve. As multiple interest rate hikes were made in 2018, the Federal Reserve has hinted at a pause in these hikes. As such, gold prices gained a market value increase of approximately three percent in January of 2019, arguably due to the lack of future increases in rate hikes from the Federal Reserve.
Moves from the Federal Reserve are, therefore, something that buyers might want to pay close attention to. With gold prices in decline over the last few years, U.S. Money Reserve believes that the market could very well be shifting for this metal. Although nothing is certain when it comes to the stock market, gold should be on your watch list as we move through 2019.