By Gemma Greer
In our nebulous economic world of stocks, shares, and online trading it is very easy to forget that our economy is heavily influenced by a weighable substance – gold. We no longer use the gold standard, so our currency is no longer anchored and backed by gold, but the long and intertwined history of gold and the economy ensures that the two still exert a tidal pull over each other. Our economic health can in many ways be judged by behavior within the gold markets. Many have noted that there is an apparently inverse relationship between the health of the gold market and the health of the dollar. As a fiat currency, the dollar is more of a free agent than it used to be when it was anchored with gold – but it’s also rather more unpredictable. In times of wavering economic confidence, people still turn to gold. This is particularly pertinent today, with inflation looking set to rise over the next year.
Psychological Associations
During the 1970s (when we finally bid farewell for good to the gold standard), the US economy experienced what is known as ‘stagflation’. Put simply, this was a time when the economy was generally rather stagnant, but inflation continued apace nonetheless. During this time, people became wary of the unpredictable and (seemingly) unstable nature of the fiat economy. Rather than take out loans and investments, people poured their money into gold. To this day we retain strong psychological and cultural ideas which intrinsically associate gold with value. Gold seemed a much steadier and less capricious investment than stocks and shares – and its value rose against the dollar considerably as a consequence. However, when the Fed stepped in and curbed the inflation by raising interest rates, the bottom fell out of the gold market. Thus, while gold seems to be a stable investment to the American mind, it is notably just as much subject to Fed policy as its more evanescent cousin, the dollar. This means that considerable profits can be made upon it if you buy at the right time.
Future Inflation
Currently, inflation is low – and so is the price of gold. People are choosing to put their money into the dollar rather than into the gold reserve. However, there is a lot of evidence to suggest that inflation is going to rise rather rapidly over the next few months. A good indicator of this is the fact that the Fed have proposed an interest rate rise. Theoretically, this should curb inflation and drop gold prices again – but the rate at which the economy is inflating, and the caution with which the Fed have put this proposal to the nation indicates that inflation will trump interest over the next year or so. While this does not always necessarily hold true, the general case is that rising inflation leads to a rise in the value of gold – meaning, for practical purposes, that a shrewd investor would do well to turn his or her dollars into gold now, and sell it on for a high profit in a few months’ time.
Other Factors
It should, of course, be noted that inflation is not the only factor working on gold prices. Gold has been defying trends and predictions over the last few weeks, its price rising and falling and falling again as the world waits for the Fed to announce its future plans. With the dollar riding high, the price of gold is generally on a downwards trend, but this is in many ways driven by expectations of what the market will do rather than solid evidence. There are many commentators who believe that – once active economic forces from the Fed come into play and the economy takes on a more recognizable pattern – the price of gold will surge as the dollar falls. It is also worth noting that the Eastern market exerts a not inconsiderable pull over the price of gold. In China, gold is routinely used as a savings and investment device by people from all walks of life, and Chinese interest in purchasing American gold is unwavering. The strong dollar makes gold harder to buy for foreign investors, but, even though the Yen has fallen against the dollar recently, the taste for gold from the East remains strong, and provides a stabilizing influence upon the market as a whole. Our advice is: buy gold now, while it’s cheap. You won’t regret it when the dollar hits its next inevitable rough patch.
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