Gold as a Hedge against the Devaluation of the Dollar Research Paper

Gold as a Hedge against the Devaluation of the Dollar - Research Paper Example For example, the price of gold had been remained the same for about two hundred years after when Sir Isaac Newton had set the gold price at L3, 17s. 10d. per troy ounce in 1717. The gold prices have been raised to extreme levels after 1973. The gold rate in 1973 was $97.39 which was average price, and it rose to $444.74 in 2005, which has now become $1224.53 at the end of 2010. The calculation of five-year annualized rate of return on gold as an investment alternative has been given below. The gold rates have been taken for year 2005 and 2010, which are $444.74 and $1224.53 respectively. The formula for computing the rate of return of gold is as follows: 100*(second price/ first price) ^ (1/ (second year – first year))-100 Putting the values for second price ($1224.53), first year ($444.74), second year (2010), and first year (2005), we will get the rate of return on gold as an investment alternative for the period of 2005-2010 as follows: 100*(1224.53/444.74) ^ (1/(2010-2005) )-100 = 22.4539074 From the result we have got, we can get the rate of return on gold as an alternative investment, which is in this case is 46%. Relationship between gold and USD value: This section will provide the necessary details about the relation between the gold and USD value in both the domestic as well as in the international economy. Some of the key factors will also be presented that affect key changes into the value of USD. Firstly, we will be talking about some of the factors affecting the US economy on the domestic economy. The domestic economy actually tends to affect the exchange rates of a country. The apparent position of the US economy in the economic cycle is one example, in which we experience a boom, bust, and then expansion or contradiction. Factors such as economic growth, inflation and economic outlook actually highlight the economic condition and health of the country. The level of interest rates will be influenced depending upon the economy’s posit ion in the economic cycle, e.g. the economic cycle’s booming phase will experience the interest rates to be increasing despite the slow demand. The possibility of the occurrence of the inflation is also reduced. The monetary policy of the US is quite similar to that of Australia in terms of interest rates rising to lower down the pressures from the inflation or monetary demand. On the other hand, an increase or a decrease in the interest rates in the US causes the demand or supply of the currency to increase or decrease. ‘Debt levels’ is considered to be the major problem with the US economy. The USA is still facing the severe debt crisis as it owes to the other countries trillions of dollars. This has the effect of pressurizing the economy of the US. Another alarming factor is that the US financial institutions pay more interests to their lenders than the one they receive from their borrowers. The difference in the two countries’ interest rates really aff ects the demand of the foreign currencies. In simple terms a country will only invest into another country if the former is getting a good return from the latter on the investments. The most suitable example for this event is the higher interest rates in Australia in 2009 and the US interest rates were lower. Hence the investors moved to Australia instead of US. The overall effect of that was the upward pressure imposed on Australian dollar and a downward on US dollar. Now about the gold