January 28, 2014

You’re Trading Gold and you don’t Even Know How It’s Valued??

As the dollar continues its descent into uncharted territories, the calling towards gold couldn’t be any louder. Many people are abandoning their paper currency in trade for something more worthy. However, why is it that gold is valuable anyway, and why is this metal the place that everyone turns to when the dollar does become unpredictable?

Why So Valuable?

To begin understanding why gold is so valuable, it’s easier to just compare it to fiat money. Fiat money, or paper money, is essentially worthless. The only reason why people are able to go to the store and buy things with it is because paper money is backed purely by confidence in the economy it is printed for. At the end of the day, however, it still only costs roughly 3 pennies to make one of those dollar bills. With such a downtrodden economy, this is why so many are now finding solace in shoring up their precious metals assets.

gold nugget

Want one of these??

Some would argue that the same could be said about gold and other precious metals as well. After all, it is often valued in dollar amounts. Therefore, gold should be viewed more from the perspective of its buying power to purchase things that are necessary to human life. This might include its price against energy, shelter, food and water supplies, and things of that nature. While there is some truth to this line of thinking, gold still has advantages that fiat money never will.

For starters, people like the metal. They have been attracted to it for thousands of years, and many societies have used it for their own currency. It’s an attractive metal that people are drawn to. It’s also a rare metal that is in relatively short supply. Unlike paper, this creates a real demand for it. Gold is also time tested. Sadly, fiat money is time tested as well, but always seems to fall short of its metal counterpart.

Of course, there are many other qualifications that also help to determine its value that are less emotional in nature. The quality of the gold is perhaps the biggest factor. Where the gold is being mined will also impact the price. In unstable countries, this could cause disruptions in supply thus affecting the purchase price. Fundamental analysis is critical in getting a good deal on gold.

It’s ALL About Demand

There is something else to consider here as well. The combination of typical demand, and the influx of buyers who are scared of another run on the banks, has created a rather suspicious atmosphere for those in the buying mood. In fact, many are considering a potential correction on the horizon from a bubble this new gold rush might have created. Of course, speculation is what makes the markets go around. Fortunately, there are ways to make money in gold whether it’s up or down.

In the end, owning gold, especially when the dollar is being devalued, will always be a great way to hedge inflation. Some people want to decorate their bathroom in it, while others just want to keep a healthy reserve for the questionable scenarios. Either way, gold is just as valuable to people today as it was thousands of years ago, and that’s likely to be the trend moving forward.

Max Hansson

Max Hansson is a guest author to the site. Writing about risk, chart strategies and money management. Max is an active day trader of forex, mainly EUR/USD and GBP/USD.