In 1971, under the administration of President Nixon, the United States terminated the convertibility of the dollar to gold. This was part of a series of economic policies known as the Nixon Shock. At this time, the dollar became fiat currency, backed by nothing more than the promise of the U.S. government. In the past decade, the weakening U.S. economy and the falling dollar has coincided with a dramatic rise in gold prices. Many financial analysts believe that the current gold price is poised to set even more records in the new decade. This rise appears to be in direct correlation with the decreasing dollar value.
Investors have historically purchased gold in times of economic recession. The recession of the last decade is no exception to this trend. As the economy continues to suffer into the new decade, gold prices continue their ascension. Unlike fiat money, gold has intrinsic precious metal value. After the Nixon Shock, the dollar had no more intrinsic value than the paper it was printed on. This is often the reason that investors place their bets in gold and abandon the dollar in times of economic recession.
While the conversion of the U.S. dollar into fiat money has allowed the Federal Reserve to respond to the recession by putting more money into the system as it sees fit, this is also causes the value of the dollar to fall. This has led to worldwide uncertainty among investors and international traders. The Chinese government, for instance, began a campaign several years ago in which they encouraged their citizens to buy gold in place of dollar investments. Their campaign was highly successful and now China has one of the leading reserves of gold, most of it held in its central banking system. As a result of such widespread exchange of dollar assets to gold, the current gold price is set to grow even more.
Also helping the current gold price is the many investment vehicles in which gold can be bought these days, including exchange-traded funds, gold accounts, derivatives, investment in gold mining companies, and the more traditional route of buying gold directly as bullion bars or coins. All of these options allow the savvy investor to take part in the modern-day gold rush of the 21st century. If the predictions of many analysts are correct, gold prices could reach $1,500 by the end of 2011.