While diamonds may be a girl’s best friend, gold should actually be ranked at the top of the list.  Although gold has not historically been a popular financial tool, the current market pricing of gold reveals that this precious metal may just warrant a second consideration.

For the investors that love to play in the stock market, a debate between market favorite Google and gold will have them betting Google - hands down.  Nevertheless, some skeptics think that in the long run, gold will come out on top.  In the end, just like other stocks, Google will be a victim of competitors entering the market, shareholder dilution, and a need to grow earnings at an even pace.  Gold, on the other hand, has remained pretty stable.

To see how gold has held up in the market, let’s look back approximately 30 years.  During the 1970s, an increase in interest rates, upsets in the oil market, and political unrest sent stocks into a downward spiral, while the price of gold increased.  Had you invested in gold during that period, you would have pocketed a pretty penny, while many stockholders lost their life savings in the market. 

In today’s market, the dollar has been losing ground to other foreign currencies.  In addition, the price of oil and other commodities are at historically high prices.  The US government is overwhelmed with debt, and the housing market that padded the pockets of so many investors is headed south. 

There is a strong relationship between these events and gold.  First, the dollar’s falling value and the increasing costs of commodities are completely connected.  For the most part, commodities are traded in dollars, and therefore, with the depreciation of the dollar, it becomes more expensive to buy commodities. 

At the same time, the country’s growing debt, trade imbalances, and crumbling housing market has left the Federal Reserve unable to tighten credit.  As a result, the amount of money being printed has increased, and as each extra bill hits the market, the purchase power of the dollar depreciates with the inflation. 

Just five years ago, gold was worth about $300 an ounce.  At the same time, the dollar-to-Euro exchange rate was around $0.95 to one Euro.  That exchange rate has gotten even worse for the dollar, with today’s exchange rate around $1.45 per Euro.  If you assume that the price of gold remained the same, its relative value would be $411 per ounce.  This certainly makes it a better investment than the dollar, which still continues to depreciate in value – and is anticipated to depreciate for the next two years.  And by the way, at this writing, gold is priced at $795 per ounce.

As the value of the dollar falls, more people turn to other avenues of investing as an answer.  As stocks and the real estate market tumble in the United States, gold is positioned to increase in value – even beyond its current highs.  History reveals that gold leaps every time stocks fall, as investors turn to tangible, stable financial tools.  Adding gold to your portfolio can be an excellent option to diversify your portfolio against the insecurities of the dollar, US real estate market, and weakening of the equities market.