How does the devaluation of paper currency like the US dollar influence the price of gold, silver, and other precious metals?

It’s a well-known fact that economic volatility often drives investors to gold, silver, platinum, and other precious metals. This is especially true when downturns involve the Forex, or foreign exchange market, which is the market cumulatively made up of all of the currency trading activities in the world.

When currencies in the Forex market become devalued, investors tend to find it beneficial to turn to more tangible metal resources. Here’s what all precious metal investors need to know about currency devaluations and how they affect spot prices.

Understanding the Modern Forex Market

To understand how deflating currency values affect the price of gold and other precious metals, it’s important to first know a little bit about the modern state of the currency markets. At one time, most currencies, including the US dollar, were actually tied to the price of gold. In the first half of the 20th century, the link between gold and the dollar (along with many other currencies) was severed, leaving them to float freely in value against each other in the open global market. The final stage of this split with gold and the dollar occurred in 1971, when President Richard Nixon formally took the United States off the gold standard.

Today, few countries still tie their currencies directly to gold or other commodities. Instead, fiat currency values are much more dependent on relative exchange rates and the performance of the national economies that issue them. This has led to increased volatility in the currency market which, in turn, creates the circumstances necessary for occasional currency devaluations.

Though these devaluations are usually the result of a country’s poor economic performance, they can also be intentional. Some nations have deliberately devalued their own currencies in order to stimulate their economies by lowering the cost of their exports.

Why Do Precious Metals Win When Currencies Lose?

Because currency is used to buy all other commodities, securities, goods, and services, its devaluation can have a profound impact on almost every facet of an economy. When currency values drop dramatically, it’s usually in conjunction with a major economic crisis that also depresses stock prices.

During such downturns, the first goal of investing isn’t necessarily to make a substantial return, but to avoid the loss of value. Unfortunately, even pulling money out of the markets doesn’t accomplish this when currency is involved, as your money will be losing value even while it sits in your savings account.

This is where precious metals come in.

Because physical metals like gold and silver are tangible and permanent, they have the ability to ride out currency downturns better than less physical assets like bonds and paper money. Though the same is largely true of real estate, precious metals are much more accessible to the average retail investor.

Precious metals tend to keep their values through even the worst downturns and currency devaluations. In some cases, their prices can even rise while the rest of the economy falls, as was the case in the immediate aftermath of the 2008 financial crisis.

Which Precious Metals Should You Invest In?

The concept of diversification holds true in precious metal investing, just as it does in every other type of investment. Investing in gold, however, is considered one of the best ways to ride out a period of deflating currency values. Gold is a stable asset that offers a higher price per ounce than other investments, making it ideal for storing large amounts of value over the long haul.

With a properly diversified metal portfolio composed of bars, coins, and rounds made of a variety of precious metals, your net worth will likely be better able to weather even the most difficult periods of currency devaluation.

Be sure to check out the other articles in this series to read about more key factors that impact precious metals prices:

  • Industrial Applications
  • Struggling Economies
  • Currency Devaluation
  • Federal Government
  • Inflation and Hyperinflation
  • ETFs
  • Geo-Political Unrest