Gold and the Dollar
The relationship between gold and the dollar has long mirrored the decades-old battle between real tangible assets and financial assets.
Traditionally the dollar has been the representative currency in any analysis of gold, due to its sustained role as the world’s reserve currency and the preferred means of exchange and invoicing transactions. The cre-ation of the euro in 1999 and its subsequent ascent as a credible and strengthening currency has certainly started to challenge the dollar’s lead-ing position among world currencies, but the euro has yet to dethrone the greenback from its dominating perch. Nonetheless, the probability of such occurrence has been gradually on the rise and may fully materialize as early as 2015.
Considering the 400-year historical connection between gold and paper currencies, the 100 years of dollar dominance, and the role of gold in initi-ating the present world currency order, it is appropriate to begin this book with the evolution of the relationship between gold, the dollar, and other currencies. Aside from examining the eventual trend between gold and the greenback, this chapter sheds light on how currency market participants can absorb the price developments in gold vis-a`-vis currencies and equities in order to gain a better grasp of the cyclical shifts underpinning markets and economics.
During the final third of the nineteenth century, most countries aban-doned the silver standard in favor of a gold-based currency standard. These moves were largely triggered by Germany’s receipt of a war indemnity from France in gold following the Franco-Prussian war, prompting Germany to unload silver on its trading partners. As Germany adopted the deutsche mark, backing it with a strict gold standard, most nations followed suit and opted for the metal. But the merits of the gold standard were in doubt after the British economy began to slump in the 1880s.
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The gold exchange standard ultimately saw its demise in the 1920s when World War I disrupted trade flows and the free movement of gold. In 1931, massive gold withdrawals from London banks triggered Britain’s abandonment of the gold standard, and three years later the United States introduced the U.S. Gold Reserve Act under President Roosevelt’s New Deal. The Act reset the value of gold at $35 per ounce from $20.67 per ounce and ended the legal ownership of gold coins and bullion by citizens for over 20 years.
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