What is the gold standard?
Gold is seeing renewed interest from Americans seeking a safe haven amid volatile global economic conditions. New investors are also turning to gold after the yellow metal's price soared in 2024. Gold peaked at a record-high spot price of $2,789 per ounce last October and is still holding firm around that level as of January 21.
Of course, safety and the price of gold are just two factors savvy investors take into account when evaluating gold as an investment. Many invest in gold for its benefits as a store of value, while others see it as a hedge against inflation. The reality is gold offers a myriad of benefits that appeal to different types of investors.
Gold has also been around for millennia and played a major role in global finance, particularly under the gold standard. That history still shapes how gold is valued and traded today. Understanding how the gold standard worked can help new investors get a clearer picture of why gold continues to be a trusted asset today.
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What is the gold standard?
The gold standard is a system in which the value of a country's currency is tied to a fixed amount of gold. Many countries, including the United States, used the gold standard during the early 20th century. Governments that used this system held gold reserves to back their currency, and citizens could exchange paper money for gold at a fixed rate.
The gold standard began to phase out in 1933 when the U.S. stopped allowing Americans to exchange dollars for gold, but it wasn't completely abandoned until 1973, when the dollar decoupled from gold entirely. Today, no countries use the gold standard.
How did the gold standard work?
Under the gold standard, every dollar had to be backed by a fixed amount of gold. That meant if the government wanted to increase the money supply, they also had to increase their gold reserves. As a result, the gold standard limited the government's ability to print more money.
The gold standard also allowed citizens to exchange U.S. dollars for gold. For example, in the early 20th century, a dollar was worth one-twentieth of an ounce of gold, according to the Federal Reserve Bank of St. Louis. This meant it took $20 to buy one ounce of gold.
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What replaced the gold standard?
While the gold standard delivered many benefits, such as economic stability and a minor inflation rate, it is no longer used.
"In the past, you could exchange US dollars for gold at a central bank," says Brett Elliott, director of marketing at American Precious Metals Exchange (APMEX). "This created a lot of trust for the U.S. dollar, but also restricted the ability of the government to print money. The gold standard was eliminated through a series of measures spread out over decades, beginning with actions taken during the Great Depression."
When the U.S. stopped using the gold system entirely in 1973, the dollar transitioned to the fiat currency system we use today. Unlike money backed by gold, fiat currency has no intrinsic value. "Now the U.S. dollar can no longer be exchanged for gold and is instead backed by nothing more than a promise," says Elliott.
The end of the gold standard gave way to the free market system in place today. Now, the price of gold isn't directly tied to the U.S. dollar but by supply and demand, which is driven by inflation, geopolitical conditions, investor sentiment and other factors.
Why does the gold standard matter?
The gold standard matters in terms of investing because it helped control inflation and its removal enhanced gold's function as a store of value. As Trevor Yates, senior investment analyst at Global X, explains, "Gold's function as a store of value remains very much intact. This makes gold an extremely important asset today since abandoning the gold standard allowed governments to more easily increase the money supply, which typically translates into higher levels of inflation."
Yates emphasizes that inflationary risks have made gold even more critical in modern investing. "Since the U.S. abandoned the gold standard, one could argue that gold has become a more important asset, serving as an increasingly crucial hedge against inflation given the lack of checks and balances within the current monetary system," he adds.
The bottom line
When the U.S. abandoned the gold standard and decoupled the dollar from gold, the dollar lost its tangible backing. Ever since, gold has remained one of the few assets investors can seek as a store of value. "Gold has been the most common form of money in history because it can be made into coins but is scarce enough to have value," says David Russell, global head of market strategy at TradeStation. "It can survive financial crises, wars and geopolitical upheaval, remaining a constant store of value."
Now might be a good time to add a slice of gold to your portfolio, especially if the upward price trend continues through 2025. Financial experts often recommend aiming for a diversified portfolio, with no more than 5% to 10% in precious metals.