The U.S. Dollar Is Backed by Gold, Right?
The dollar is down, gold goes up. This is particularly confusing phenomenon to those folks who still think that the American dollar is backed by gold. It isn't. At one time every U.S. dollar in circulation was backed by gold, but today the U.S. dollar is backed only by the so-called "full faith and credit" of the United States.
The Bretton Woods Agreement
Following World War II, a system much like the Gold Standard was established under the Bretton Woods Agreement. The system allowed for many countries to fix their exchange rates relative to the dollar. Under the agreement, the U.S. promised to establish the price of gold at thirty-five dollars an ounce. All currencies that were pegged to the U.S. dollar had a fixed value that was determined by gold. Because of this agreement, the U.S. dollar was accepted in nearly every corner of the globe. The dollar held value everywhere. After all, you could exchange it for its value in gold. (That is, if you were a foreigner. Citizens of the U.S. weren't allowed to own gold between the years of 1933 and 1974).
For a time, the Bretton Wood Agreement fulfilled its goal of maintaining stability among the currencies around the world following a devastating war. Eventually, however, imbalances in the system led to its demise. In 1971, President Nixon eliminated the fixed price for gold, which made gold a commodity like any other. Gold was now subject to the law of supply-and-demand. But it no longer backs the American dollar. But unlike other commodities, gold is still perceived as being a reliable and tangible investment.
Gold Inspires Confidence
When the American dollar is weak, the price of gold goes up. It seems only natural that people turn to buying gold when they fear an economic collapse. Investors who have lost confidence in the U.S. dollar or the stock market invest in gold with more vigor because they believe that gold will always be valuable. Gold is a so-called non-fiat currency. This type of currency is present in physical form, and there is only "so much" gold in the world. For this reason, it is perceived as a safe investment. On the other hand, the American dollar is a currency that is fiat currency that can be printed and pumped into the economy, or even inserted into the economy electronically. It is easy to see why investors trust that gold will be worth something, even if the dollar falls completely.
Gold Prices Never Higher
Why is the dollar falling right now? As mentioned above, the U.S. dollar is backed up, not by gold, but by the "full faith and credit" of the United States. That sounds good on paper - but in reality, when the U.S.' credit rating was downgraded in the fall of 2011 by Standard & Poor's, it was bad news for the dollar. How can you have faith in a dollar that is only backed up by "full faith and credit" of a country whose credit is no longer spotless? Investors see gold as a safer bet in the current economic climate, and economists say that the trend is only poised to continue. Gold has never been higher, which is good news for folks looking to sell scrap gold to help them get through tough economic times.
Article Source: http://EzineArticles.com/?expert=Daniel_Sims
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