“Gold is denominated in U.S. dollars, meaning its price is quoted as the amount of dollars required to buy or sell one ounce of gold. The price of gold rises and falls with supply and demand for gold…
…However, a big determinant of its price is the value of the U.S. dollar against the currencies of other major trading partners. Commonly, the U.S. dollar is quoted as an index or ratio. For example, the closely followed dollar index (DXY) is currently trading at 96.00 and the dollar’s exchange rate versus the euro is 1.12. These are valid price indicators, yet also misleading, as they solely describe the value of the U.S. dollar relative to other currencies. If another country debases their currency more aggressively than the U.S. does, the dollar may rise in price but has it truly gained value? The exchange quotes and pundits may say yes, but the answer is clearly no.
The only proper measure of the value of a dollar is its purchasing power. In the 1950s, $1 bought a couple a full meal at McDonalds including a burger, fries and a shake. Not only that, but the couple walked away with change. Today a similar meal at McDonalds would run the couple well over $10. The easy conclusion from that example is that prices have increased. However, one could more accurately state the value of the dollar has diminished. Had one been able to preserve those burgers, fries and shakes for over 60 years they would have retained the original purchasing power of their dollar bill (currently $10+ at McDonalds). Although storing food and most every product/commodity is fraught with risks and complication, one takes the additional chance that there may not be demand for such goods in the future. Had one bought $1 worth of gold in the 1950s, it would have been worth $33 today.
Therein lies the value of gold.”, Michael Lebowitz, Excerpt from “The Case for Gold to Protect Clients’ Wealth: Shorting the Federal Reserve”, Advisor Perspectives, October 5, 2015