The US Dollar is Tarnished but Gold is Glittering

Do you buy gold or not? What's the rise in gold's value all about? The price of Gold has been approaching an all time record high in recent days, closing yesterday at $825 an ounce. The last time gold soared to such heights was in 1980, when gold reached $873 a ounce.

There are many reasons for golds spectacular rise over the last year. Wars and political uncertainty has caused gold to increase in value, as has the dollar declining in value against the Euro and other currencies.

For some, parking their money in gold is for speculation. For others, gold is a place to convert their dollars or yen into a commodity that has been shown to hold its value through inflationary and deflationary times. Gold has been a store of value and has been traded going back thousands of years.

Investing can take the form of gold stocks, mutual fund investing or even holding rare gold coins or gold bullion itself.

At one time the United States and most of the Europe operated on a Gold Standard, where the currency, if not the outright coinage was backed in gold. In 1900 a troy ounce of gold (one-twelfth of a pound) was worth about $20.

Paper money circulated, backed by gold held in banks and by the Federal Government , and later the Federal Reserve. Silver also served as a back to fiat currency, the paper money that circulated for convenience and safety. Printed on the bill was the promise of redemption in gold on demand.

There are very few people alive today who were adults when the United States backed its currency with gold. Those who can remember know that they could take the paper money into a bank and trade it for the stated amount in gold. Few people did; it was easier to carry the paper money.

It was the Great Depression that derailed the backing of US money by gold. Many banks were failing, causing millions to lose life savings. People and institutions the world over wanted to be able to take their money home in the form of gold.

This run on the banks started to deplete the Federal Reserve of its store of gold. It was then that President Franklin D. Roosevelt signed an executive order to make private ownership of gold illegal. The United States was effectively off the gold standard, and the new "Federal Reserve Notes" were printed and put into circulation. These same bills are used today and are backed not by a tangible commodity (gold) but by the "full faith and credit" of the United States. On the Federal Reserve note of any amount today you will see the following: "This note is legal tender for all debts public and private". In other words, the money is good because the US Government says it is.

Many people lost money when they were forced by Roosevelt's executive order to turn in their gold and gold certificates. The new price of gold was set at $35 per troy ounce. A huge percentage loss for those had just turned in their gold. Is now been revealed that FDR just arbitrarily decided the new value to be $35.

The Gold standard was resurrected --sort-of-- by the Bretton Woods agreement that fixed the dollar to gold, and then fixed other nations currency to the dollar. The US Dollar was "as good as gold".

The final straw for even this Gold Standard came in 1971. Several countries wanted to redeem their holdings in the US for gold, more gold than the US Treasury had on hand.

This killing of the Gold Standard has led to an ability of the Federal Reserve to print as much money as it deems necessary, as there is no law or restraint that says so much gold to so much value on the dollar. When this happens there is inflation.

If --and it is always an if, because currency regulation is not a science but more of an art -- the Federal Reserve can read the financial tea leaves correctly it can keep the spigot just right on the currency supply, where the amount of dollars in circulation equals the amount of goods and services to be purchased.

For the last year especially there has been a great fear that the United States is spending beyond its means, and the confidence in the dollar as well as its value is sinking in relation to gold and to the euro and other currencies.

This has driven gold to its higher position. Some experts see gold hitting $1000 per ounce. If it does, you will probably see things like what happened in 1980 with the last record high. People will be selling their jewelry for cash, and even having gold teeth extracted.

Since 1975 US citizens have been able to own gold again. Roosevelt's executive order was rescinded. Many bought coins and some bought stock, but after the peak in 1980 the value of gold steadily decreased, until it reached a record low in the 1990's.

Today it is institutions and individual across the globe that are bailing out of the dollar and buying gold in one form or another. In addition, the use of gold in products being made or purchased in China, with its exploding economy, has put a new shine on gold.

Will the United States return to a gold standard to back its currency? It's doubtful. Calling dollars back to a fixed amount would be too much of a shock to the economic system. As long as people and institutions have faith that the US will meet its obligations the dollar will have value. But its days as the world's reserve currency may be ending. Time will tell.

Meanwhile, if you want some gold to own, you can probably still get it as it rises in value. But like everything that goes up, such as stock and now real estate, it comes down too. Financial advisors usually advise that a person hold about five percent of their portfolio in gold, usually in the form of gold mining stocks.

All that glitters is not always gold, though not in today's money world. This time gold is shiny and old is now new again. The old metal is back. Gold is as good as gold.