Even though gold no longer backs the US dollar (or other world currencies for that matter), it still holds importance in today’s society. It is still important to the global economy. To validate this point, one need look no further than the balance sheets of central banks and other financial organizations such as the International Monetary Fund . These organizations are currently responsible for holding nearly one-fifth of the world’s above-ground gold supply. In addition, several central banks added to their current gold reserves, reflecting concerns about the global economy over the longer term.
Gold preserves wealth
The reasons for gold’s importance in the modern economy center around the fact that it has successfully preserved wealth over thousands of generations. However, the same cannot be said for paper currencies. To put things into perspective, consider the following example:
In the early 1970s, an ounce of gold was $35. Suppose at that moment you had the choice of either holding an ounce of gold or simply keeping the $35. They would both buy you the same things, like a new business suit or a fancy bike. However, if you had an ounce of gold today and converted it at today’s prices, it would still be enough to buy a new suit, but the same cannot be said for the $35. In short, you would have lost a substantial amount of your wealth if you decided to hold $35, as opposed to an ounce of gold, because the value of gold has risen while the value of a dollar has been eroded by inflation .
Gold as a hedge against the dollar
The idea that gold preserves wealth is even more important in an economic environment where investors are facing a falling US dollar and rising inflation. Historically, gold has served as a hedge against these two scenarios. As inflation rises, gold usually appreciates. When investors realize that money is losing value, they will begin to position their investments in a hard asset that has traditionally held its value. The 1970s represent a prime example of rising gold prices amid rising inflation.