Before 1971, the value of the dollar was pegged to gold. Pegged as it was to a stable metal, the value of dollar saw little movement for many years. From 1879 to 1932, the value of gold was set at $20.67 per ounce, then ranged from $35 to $43 onwards until 1970.
Then in 1971, the US decided to float the value of the dollar. The dropping of the gold standard for fiat currency caused gold price to skyrocket, even reaching $594.90 per ounce in 1980. Afterwards, gold price dipped, ranging from $300 to $500 only. It wasn’t until 2006 that price of gold shot up to over $600 again.
In essence, the fluctuations in gold price have more to do with manipulation of the dollar. In other words, the inherent value of gold never changes, only the value of dollar attached to it. When the value of the dollar fluctuates, so does gold price.
Three factors that affect gold price:
- 1. Inflation. During inflation, people veer away from stock markets and turn to commodities, particularly gold, as they are viewed to be safer bets. The increased demand for gold cause hike in prices.
- 2. Value of US dollar. When value of US dollar is in decline, investors use gold as a hedge against it.
- 3. Interest rates. When interest rates are low, so are returns on real estate and bonds. People turn to gold as it has more stable value than interest rates or paper currencies.
Like price of other commodities, gold price mirrors the strength of economy in which it is contextualized. However, its value is more stable than that of paper, which is why investing in gold is always a smart move.
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