Any US citizen or resident has by now noticed the growing public fascination with gold. The purchasing power of the dollar is fading fast due to inflation but it seems like this precious metal just gets more and more valuable. The truth about the issue is more complicated than that. However, it is certainly true that gold is making more and more sense as the object of people’s investments.

What Happened to the US Dollar?

Many Americans alive right now remember that the dollar has always been the rock of the world economy. The British pound and a few other currencies have usually been worth more than the US dollar but they were not as widely used. Major foreign powers such as China kept significant reserves in dollars even though they issued their own particular, national currency.

In the last decade however, and especially in the last few years, the value of the US dollar has declined. Some nations are even calling for an international move away from the dollar as the basis for exchange. If you want to know how this drastic change came about, you really need only to look at the economic policies of the last few years.

A number of economic crises have hit the country at the same time. However, it was the reaction of the US government to these crises and not the crises themselves which brought about the imminent downfall of the dollar.

In order to combat the rising deficits without raising taxes or cutting spending, the government has been printing money to pay for these expenses. Too many uninformed people, this seems like an excellent way to pay off debts. What they do not understand is how these actions undermine the value of the dollar itself.

Each US dollar represents a portion of the entire economic might of the United States. There are many more dollars in existence but, for the purposes of this examination, imagine that there are just one million dollars in existence.

This would include all paper notes and all digits in bank accounts and so on. If you had one of those dollars, you would possess one-millionth of the economic power of the United States. This would be an impressive holding for anyone, even the richest people alive.

Now, imagine that the US government prints a million more dollars to pay for expenses. This might seem like the whole economy gets richer because now there are twice as many dollars around. However, what it really means is that each dollar only represents half of what it used to represent. The only way for money to earn more purchasing power is through an expansion of the economy.

This is a representation of what has actually happened to your dollars over the last few years. Every time that the government prints money in its quantitative easing programs, the dollars in your bank accounts and invested in your stock portfolios lose significant fractions of their total purchasing power. You may have noticed, though, that while the dollar is losing ground the price of gold is going through the roof.

Has Gold Really Gained Purchasing Power?

It would appear that gold is gaining while the dollar is losing. What is really happening, though, was best described by US presidential candidate Ron Paul when he used gas prices as an example. The US government has done a great job of disguising inflation and keeping public alarm at a minimum.

According to price index studies and other research whose parameters are closely controlled, inflation is no higher than normal. However, those studies exclude things such as food and fuel because they are usually volatile.

According to Ron Paul, gas prices are never going to come down. Everyone thinks that gas prices have gone up but what has really happened is that the dollars with which people buy gas are no longer worth as much. The price of gas has gone up by about 300% since the turn of the century. If you wanted to buy gas with gold, you would actually pay a little less than you did back then.

Gold is a great investment. What has happened in the economy is not so much that the value of gold has risen. Instead, gold is keeping pace with inflation. It is a finite resource and cannot be multiplied like paper dollars. Every time that the government prints money, you can expect gold to rise in value.

How Can an Investment in Gold Protect My Wealth?

Gold makes perfect sense as an investment now. Even high-performing stocks, in this analysis, are not keeping up with inflation. Gold is. By putting your money in gold, you are more than keeping pace with the runaway inflation that is probably on its way after this latest round of quantitative easing.

Here is an outstanding presentation on inflation, the economy and the purchasing power of gold