MONEY & INVESTING

Gold price chart courtesy kitco.com The eyes of investors round the world are on gold. The price of gold, that is the "spot" price for an ounce of gold, recently surpassed $1,000. Certainly the $1,000 mark was considered to be important resistance and some investment strategists think that a bull run is now underway. Their price points? $1,200 in short order but they predict gold at heady numbers such as $2,000…. $3,000…. and, yes, even $5,000 an ounce.

What is gold other than being the precious yellow metal of which jewelry is made and which has some industrial applications? Why is it rising? Answers presented in this column are a superficial treatment of the subject, which is worthy of more reading and discussion with your investment adviser.

Gold is a commodity, albeit a precious commodity, that has been used as a "store of value and medium of exchange," more simply termed as money.

Sure, other things have been used as money: cattle (but you have to feed them); salt (but you have to keep it dry); silk and spices (not everybody wants them); cigarettes (popular on battlefields in World War II).

Gold "stuck" as a medium of exchange because it was relatively easy to store and was prized by people across countries and across cultures. Besides, governments simply can't print more gold and devalue your "store of value." It has to be found/ mined in order to increase supply. Aristotle defined five reasons why gold was money: it is durable, divisible, consistent, convenient and had value in and of itself.

People think the "dollar" is money but it is not; it is a currency as are the Euro, British pound and Japanese yen. Currencies are a creation of governments.

Governments want to control money and have done so by initially issuing currency backed by gold but ultimately replacing it with currency not backed by gold. Most currencies are truly paper — fiat currencies — as they are not backed by anything or much of anything except for a few European countries which historically kept large gold reserves.

Currencies used to be fixed relative to each other. Most governments do not set exchange rates and allow free market forces to determine their value relative to each other. Not all countries, such as China, allow a free "float." China pegs its currency to a fixed exchange rate with the U.S.

In recent years, and very much so in recent months, the dollar has been sinking relative to other currencies. If you are a foreigner holding dollars, your value is going down. Yes, your non-dollar holdings are appreciating relative to the dollar, but the truth is that a lot of foreigners and foreign governments hold an awful lot of dollars. Why? Because we are the world's reserve currency — a privileged status. This means that worldwide transactions could largely, most frequently, preferably and reliably be executed in dollars and the trading partners would be happy. But not so in today's world.

Yes, many foreign countries can let their currency appreciate. But China does not. China has a dilemma shared by other large net exporters to the U.S. It needs to sell its products in our market and if it revalues its currency upward, its exports drop, GDP falls and unemployment worsens. So China has a problem of keeping its currency pegged to the dollar, all the while knowing that the dollars taken in profit from this trading are becoming worth less and less vis-a-vis world currencies.

So why is the dollar dropping? Answer: Fed and fiscal policy. John Paulson, considered the most successful investor since Soros, said "Once the Fed began directly buying Treasuries and mortgages, I lost faith in the dollar as a reserve currency for my assets….. When I look at what the risk is, the risk to me is far more staying in dollars than it is in gold at this point."

Mr. Paulson was saying what the world is thinking: the Fed is printing money (ultimately inflationary) and the fiscal policies are incurring large deficits (most easily repaid with a devalued currency). World Bank President Robert Zoellick most recently said, "The United States would be mistaken to take for granted the dollar's place as the world's predominant reserve currency… Looking forward, there will be increasingly other options." Reaction? Choke.

Why not change Fed and fiscal policy so that the dollar has support and can remain as the world's reserve currency? Dollar support is at odds with our current economic curative policies. The No. 1 cure for the Great Depression was inflation. In 1933, Roosevelt took us off the gold standard so that the government could print paper currency, and a lot of it. He purposely devalued our currency in order to get deflation to end. People were forced to buy/invest in assets.

So, beyond acting as a hedge against inflation, gold is a haven for money exiting dollars. Where does gold belong in a portfolio? Talk to your adviser. If you are young, really young, you can place a bet. If you are building a nest egg or in retirement, you might find it can be incorporated into your portfolio in some form (gold stocks) or you might take a look at other strategies protecting you from devaluation of our currency.

Jeannette Rohn Showalter is a Southwest Florida-base d chartered financial analyst, considered to be the highest designation for investment professionals. She can be reached at jshowaltercfa@ yahoo.com.