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Money And Currency – Gold Versus The Dollar
The only thing actually tied to gold is the deposit receipt. That would be a warehouse receipt for a specific ingot, showing the size and serial number of the ingot. The US silver certificate was a phony receipt, having a serial number but not representing a specific ingot.
The whole point of currency is to get away from the restriction of one receipt for a specific ingot or even a specific amount of backing by metal or anything else. People accept paper because it's such a nuisance to carry coins, but that has nothing to do with the banisters reasons for pushing paper.
It is unlikely to ever have a currency backed by gold, and there are a lot of reasons for that. Financing used to be conducted by "real bills" (find it at Wikipedia) and that system worked well. But central banks can't stand competition from any sort of honest money so they abolished real bills. (That is also why Norfed got raided.)
The big question: How does Gold affect the Dollar? And does this trend help in investing choices and strategies?
The dollar was the ‘gold standard' from the beginning of the 1800 through 1930 the dollar was pretty well tied to gold and almost 1 for 1.
The Federal Reserve was created in 1913 also known as ‘The Fed' and then the process started have taken us off the gold standard.
The price range of gold right now has recently been around $870 to $1030 per ounce as of this writing in 2010.
August 15th 1971, President Nixon announced that the United States would no longer redeem its currency for gold.
Price of gold has been extremely consistent.
What you're actually seeing is the price of the dollar going down. Defilation. Which is quite extreme at this point and a lot has been voiced about the concern for the dollar making a comeback versus gold.
With that you can tell that the price of dollar is generally inversely proportional to the price of gold but with great concern at this point of our economic history.
Now, we'll have to take into consideration the value of our U.S. Dollar in the economy but this is another issue.
Now for an update on the gold investment strategies that will work with an active gold market and hopefully you'll find some information you can use.
As gold prices soar during this the end of 2009 due to the weak dollar and fears of inflation, investors have begun searching for ways to bet on the precious metal even though commodities are esoteric and a bit hard for most to follow.
While some may be hoarding gold metals, others are looking for investments that move in tandem with the price of gold. Investors should be careful when selecting securities other than those indexed to gold because they may carry extra risks, as you will see in the information below. Further, some investor professionals have recommended purchasing gold outright, through 2001.
Investing in Mutual Funds to gain exposure to gold is probably the messiest route. Funds such as Vanguard Precious Metals and Mining have surged this year in 2009, but they hold shares of companies that engage in a wide range of mining activities and mining at large is very depressed right now. They don't zero in on gold. The Vanguard mutual fund is up more than 70% this year, while gold and the S&P 500 Index have gained about 30% and 20%, respectively. In the past three months, as gold has risen an additional 15%, the Vanguard fund has eked out only a 5% gain over the life of the fund which should tell you about fast sudden prices changes in stocks and funds, there is usually an equal and opposite correction at some point in the future, and this is often ‘unplanned' and not so easy to predict as well as sometimes difficult to get out of a position to achieve a profit.
Mining for gold is a tricky and expensive proposition. A company must buy land, purchase expensive machinery, hire workers and deal with government bureaucracy in the most corrupt areas of the world. Mines are a bit of a wild bet as well. As much technology exists to help determine where gold might be found, the whole venture remains a ‘venture capital risk' if you want to use a phrase to describe it.
Mining companies often "hedge away" much of the benefit of higher gold prices with derivatives. This is in effort to control potential losses from operations. Mining operations like Barrick Gold and Goldcorp have risen faster than the broader stock market this year, yet when comparing the stocks' historic price trends versus that of gold, it's clear the price of gold isn't the sole driver of the movement. So what you're seeing is their ‘out favor business insurance' in process. Again, getting to the bottom of how the various trends work and the underlying ‘fundamentals' of the various price moves. The entities past experiences and desire to protect their own business interests come in to serious play when attempting to track and follow the basis for a trend.
For some industry technical analysis tools we want to look closely at the ‘R Squared Values' - When regressed against gold prices, Barrick and Goldcorp post adjusted R squared values -- a measure of how well the independent variable (gold) explains the movement in the dependent variable (the shares) -- of only 0.35 and 0.66, respectively, indicating a mild correlation to the price of gold for Goldcorp and a poor correlation for Barrick. (One is a perfect correlation.) External factors affecting the stocks overall makeup end up making them poor proxies for gold investments.
Shares Stock Prices of companies that deal in royalties for gold mines may be alluring as well, especially because they sidestep mines' operations risks. Those companies tend to avoid derivatives to hedge their bets, but they still must select mines that will be lucrative in order for their investment bets to pay off. A few bad investments can quickly destroy investment profitability.
As a result, companies such as Royal Gold and Tanzanian Royalty are even less tied to the price of gold. With adjusted R squared values of only 0.5 and 0.13, respectively, these companies owe little of their share-price movement to the then current value of gold. In fact, both show a stronger correlation to the S&P 500, making them particularly poor choices for investors who want less exposure to the broader stock market and more exposure to gold prices.
So what is left to invest in? ETFs or Exchange Traded Funds indexed to the price of gold are the smartest bet because they forgo the messy externalities that accompany most other assets that are said to offer exposure to gold. ‘Spiders' or SPDR Gold Trust and iShares COMEX Gold Trust are two of the most popular choices of seasoned investors from prior years and years to come. I have had personal recommendations from a top investor and consultant who has been a good friend for many years to use these investment vehicles for, at minimum, Gold and other commodities as well.
So here you have it, a brief review on the issues of investing in Gold, how the devaluing of the dollar can affect the price of gold, how to approach gold investing and what to generally watch out for.
Lastly I hope that with this information, the readers will see the need for all of us to do our part to help improve the economy with our creative efforts. The information provided really state that the markets, stocks as well as metals are in upheaval and one needs to take great care in investing in such markets.
About the Author
Joshua Penman is an Author, Researcher and Web Manager for the sites: http://www.MoneyandCurrencyNews.com and http://www.CurrentEconomicTrendsandNews.com
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