There is a lot of talk in the news lately about the value of the U.S. dollar. I wanted to make it easy to understand why this should be important to you. First, let’s take a quick look at the history of the dollar to gain some perspective.
1776 – American currency begins when the colonies declare their independence, and silver and gold are its backings.
1834 – Gold becomes the primary backing of the U.S. Dollar.
1862 – The first $1 bill is issued, and banks print them. During the Civil War, paper bills were printed and temporarily not redeemable for gold or silver, to provide money to support the war.
1877 – The government starts printing the U.S. dollar, rather than banks.
1879 – The dollar returns to a metallic backing but only by gold this time.
1933 – President Roosevelt stops allowing people to exchange dollars for gold. The exchange was only allowed for foreign governments.
1934 – It becomes illegal for Americans to own gold, due to the Great Depression panic and run to own gold.
1969 – Implementation of the current U.S. dollar design and wording occurs.
1971 – President Nixon no longer allows foreign governments to exchange the dollar for gold. Completely removing gold as a backing to U.S. currency. At this time the U.S. dollar begins its independent valuation.
1974 – President Ford allows Americans to own gold once again.
In the United States, the Federal Reserve is protective over the value of the dollar. They will try to control the number of dollars in circulation so that the value will remain as stable as possible. We know, with basic economic principles, that increasing the amount or availability of something will cause the price to decrease. Limiting supply will drive up the price. This principle applies to gold, silver, and the U.S. dollar. When there are lots of jobs and people are making money the quantity of dollars available to the public rises, and this decreases the price or value of the dollar (this is the period we are in today). When this happens, it takes more dollars to buy something (because the value decreased). When the value of the dollar decreases, it is called inflation.
When the dollar value decreases, there often becomes an increased interest in buying metals like gold or silver. The demand for gold or silver may increase, but the quantity does not change (there is limited supply), so the price rises for gold. People often view holding gold is a protection against inflation or the decreasing value of the dollar.
The opposite happens as well, when there are fewer jobs available people make less money, and there are fewer dollars available to the public. The value of the dollar will rise again and the number of dollars it takes to buy goods and services decreases. The demand for gold may decrease as a result and then so will the price of gold.
What does it all mean to you, in your daily life? Well, unless you travel overseas and exchange U.S. dollars for other currencies it doesn’t mean much day to day. If you do travel abroad, the exchange rates will change with the changing value of the U.S. dollar. You will be able to buy more or less foreign products as a result. For example, when the U.S. dollar value decreases foreign currencies become more valuable, and the prices of foreign products become more expensive to those with U.S. dollars.
You need to be aware of what your dollar can buy because it will impact your budget. Hopefully, your income increases when the price of goods and services increase (or inflate), but this is not always the case. If your job or company is not keeping up with the rise in prices, then you may want to look for other sources of income or another employer. Be aware though; sometimes companies provide raises or wage adjustments in times when the general cost of goods and services are not rising. Unfortunately, not everything happens at the same time. The news will often speak in generalities about the rise in wages and the rise in prices.
The KEY INVESTMENT THOUGHT today is to consider if metals are an appropriate investment for your portfolio. Consider that the right time to buy metals can be when the value of the dollar begins decreasing or at the beginning of an inflationary period. You must study what is happening in the metals market; there is no guarantee that the price of metals will rise when the value of the dollar decreases.
Many people are upset that the dollar was removed from the gold standard or backed by gold in the 1970s. Try not to get caught up in the past and things that you cannot change. Make the most of what you can change and consider gaining some knowledge about owning hard assets like metals. Review your risk tolerance and goals before investing. Understand and compare the costs or fees associated with placing trades to buy or sell a precious metal, such as gold or silver. Shop around for the best broker, ask questions and get referrals.
Sources: A Timeline for the U.S. Treasury: https://www.treasury.gov/about/history/Pages/1900-present.aspx, https://www.richmondfed.org/faqs/gold_silver/, https://fas.org/sgp/crs/misc/R41887.pdf, http://www.onedollarbill.org/history.html
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