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Saturday, June 22, 2013

Currencies or commodities? A comparative overview of gold and the U.S. dollar

The value of precious metals can also fluctuate
Gold supply is limited, but fiat currency such as the dollar is not
By Mike Jefferson

There was a time when to talk about the U. S. Dollar was to talk about gold. The history of the dollar is tied to gold. In varying degrees, the U. S. and the world have used gold as a bench mark of value for all currencies.

Today, no major economic currency has their value tied to a gold standard. In spite of this, gold remains a major factor in international economic valuations. Most nations hold substantial gold in their treasuries. The worth of both the dollar and gold are used as a way to measure the value of other currencies and items of value. So, how do gold and U. S. currency compare?

The similarities between gold and the dollar are many. There are opportunities for trading both on public exchanges in many forms. There are many stocks available for trading. Both are traded on the futures market and in the form of ETFs or Electronically Traded Funds. The dollar is also traded on the Foreign Exchange. The price of both fluctuates daily. So, should you stuff your mattress with dollars or bullion and coins?

This may be the only clear cut answer to the question of dollar vs. gold. A mattress stuffed with paper dollars is clearly at an advantage, in terms of comfort, than a mattress stuffed with lumps of gold. The issue of lumpiness aside, is one or the other a better investment? Both gold and the dollar are universally recognized as valuable. If you buy physical gold, know that bullion must be assayed and gold coins are subject to a retail markup. However, the value of gold extends historically way back to ancient man. 

Gold has been treasured far longer than the dollar. In fact, gold holds it inherent value due its relative scarcity, its durability and its beauty. The same cannot be said of paper money. Unlike gold, the value of the dollar does not reside in its physical presence. The value of the U. S. Dollar is linked to the strength and stability of the U. S. economy.

The stability of the economy is measured by several key factors. Overall debt of the government and its ability to repay that debt is one. The trade deficit which is the ratio of goods exported and imported is another. The health of U. S. Treasury notes is a third. In this case, how you view the stability of the U. S. Government may be the determining factor that sways you either way.

Probably by now you clearly understand that I recommend investing in Gold; throughout history mankind have been using it as a currency and it will probably continue to be a major key player in trading transaction long after the U.S. dollar will be forgotten. Additionally Gold is used in our society for many purposes and there for it will be the wise choice to purchase some gold in your next investment. 

About the author: Mike Jefferson is a senior Market Analyst and Financial Writer for NetoTrade, a global forex brokerage and investment company.

* Image licenses: 1.  Gold Bars, by Виталий Смолыгин  2.  One Dollar, by Petr Kratochvil