In brief, the "gold standard" is a monetary system that directly ties the value of a nation’s currency to gold. Countries that adopt a gold standard set a fixed price for gold and then proceed to buy and sell it. Under a free-market system, gold is a currency, although it is not often thought of as one.
As we discussed in the prior Section, the price of gold fluctuates relative to other forms of exchange, such as the U.S. Dollar, the Euro or the Japanese Yen. Gold can be purchased and stored, and, while it is not often used as a direct payment method for everyday use, it is highly liquid and can be converted into cash in almost any currency with relative ease.
Gold has maintained a long-standing relationship with the U.S. Dollar, and, over the long term, gold will generally move inversely to it. With instability in the market, it is common to hear discussion of creating another gold standard … but a gold standard is assuredly not a flawless system. Viewing gold as a currency and trading it as such can mitigate risks to paper currency and the economy. However, people must be aware that gold is “forward-looking”, and, if one waits until disaster strikes, it may not provide an advantage if it has already moved to a price that reflects a slumping economy.
There are times when gold is likely to move higher and times when other currencies or asset classes are likely to out-perform. Gold is likely to perform well when confidence in paper currencies is waning, when there is potential for war, and/or, when there is a lack of confidence in Wall Street-type trading instruments.
Currently, gold can be traded in multiple ways, including buying physical gold, futures contracts and gold ETFs. Alternatively, investors can participate in just the price movements without owning the underlying asset by purchasing a "contract for difference" (CFD).
A post gold standard, free-market system where gold is considered a safe-haven can be an indicator of uncertainty. Gold allows traders and individuals to invest in a commodity that can often partially shelter them from economic disruptions which can occur under any system. Just as there are times when it pays to cross a border in order to buy goods in another country because of a favorable exchange rate, gold should also be viewed in this manner.
And, there are times when it is favorable to own gold and other times when the overall trend in gold will be benign or negative. Notwithstanding, even with the official gold standard gone, gold continues to be impacted by currencies and global sentiment, and, must be traded in the same way as a currency is traded.
As for the problem of countries not playing by the rules, this is likely a problem that will not go away under any system. But at least under a free-market currency system, over the long run, countries are penalized for not adhering to protocols. In any event, countries around the world continue building up their respective gold reserves.
No matter what system is in use, its effectiveness heavily relies upon investors' belief in the system. The lure of the gold standard was that it provided the illusion that paper money was backed by something substantial, thereby making its value a matter of the mass perception of the global market place.
By purchasing gold, people can shelter themselves from times of global economic uncertainty, and, in periods of hyper-inflation, gold has functioned extremely well as a hedge. Trends and reversals occur in any currency, and, as we have discussed, this holds true for gold as well. Gold is a pro-active investment designed to hedge against potential threats to paper currency. However, once the threat materializes, the advantage gold can offer may have already disappeared. Since gold by its nature "forward-looking" ... those who trade it must be "forward-looking" as well.
Just like any commodity, it is impossible to accurately predict the price of gold, as many have tried and many have failed. Every day, thousands of investors around the world study all of the metrics involved in the price of gold. Some of the experts will take all of this information and accurately predict the future price of gold, while other experts will see the same information and guess incorrectly.
Bottom line … if you truly desire to prosper from the acquisition of gold, then it is imperative that you seek out and engage experts you trust. Identify that expert who has accurately predicted various gold value spikes over history, and, concurrently takes all of the data available in using that information in order to make an informed decision.
