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Wednesday, December 14, 2005

Why Does The Price of Gold Change?

From the 1800s to 1975 the price of gold and gold coins remained fairly steady at $19 to $21 US. In 1975 the gold standard was removed and this then contributed to the increased fluctuations in the price of gold.

The dollar was originally pegged to gold in March 1900 and the dollar was then 'backed' by "twenty-five and eight-tenths grains (1.67 g) of gold nine-tenths fine", and was set as the standard unit of value. The value was then set at $20.67 per ounce of gold. Consequently there was little movement in the value of the dollar, being pegged to a stable metal. The dollar, and the economy was fairly stable for many years.

Until, in 1975 the United States floated the dollar with respect to both gold and other currencies. With this the United States was, for the first time, on a fully fiat currency and the dollar was no longer pegged to gold and there was, in effect no gold standard. Today the dollar, like the currency of most nations, is fiat money without intrinsic value, which means that it has no backing and would be entirely worthless but for the fact that people have been persuaded to use and accept it as if it had worth.

After the gold standard was dropped the value of gold shot up to peak at over 640 dollars per ounce in 1980 before settling in the 300 to 500 range which it now occupies. The economy also suffered with waves of inflation and recessions. It has continued to do so ever since.

Gold, however, continues to have value and although the 'price' fluctuates more due to the manipulation of the dollar than anything else, the value of gold remains stable.

So, in point of fact, it could be considered that the value or price of gold is not changing. Only the dollar value subscribed to it is changing, depending on the fluctuations of the value of the dollar and the vagaries of the political, and economic climate.

It pays therefore to invest in gold and gold coins.

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