In the past 100 years, USD has lost 99% of its purchasing power. In the same period, the price of gold grew by a factor of 100%.
In 1981, president Richard Nixon removed the possibility of redeeming US dollars for gold, which led to the gradual weakening of the greenback. This outcome came after decades of inflation caused by the economic depression in the 30's, and then a massive wave of US expenditure to finance the cost of the Second World War, which also pushed up the prices.
It is the increase in prices of goods and services that best demonstrates how the dollar progressively depreciated. As a result, the price of gold reached a record of $843 per ounce in January 1980, while the average price in January 1980 amounted to $677.
Gold prices started growing fast in the 1970's. When the price reached $677, it effectively meant that USD had lost 97% of its purchasing power since the creation of the Federal Reserve in 1913. Next, the Fed became an extremely powerful body which managed to stop the erosion of the dollar for a while. Afterwards, a new period of growth and prosperity rejuvenated USD.
For a while, inflation didn't affect the dollar much, and this, in turn, influenced gold prices. By 1999, one ounce traded for just $252, down 70% from the January 1980 peak. However, beginning with 2001 USD started depreciating in the global currency market. This continued until 2008, as gold appreciated from $256 to $1,023. The second major USD dump took place in 2011, while gold grew to $1,896.
After gold reached an all-time-high in January 1980, USD stabilized and grew stronger. Relatively low inflation in 2011-2016, in turn, led to lower gold prices: the yellow metal fell by 45% from $1,896 to $1,049 per an ounce. Since then, gold has reached a new ATH at $2,060 in 2020, but now it's trading at $1,800 per ounce.
USD valuation periodically changes, and such changes can develop over many years (1980-2000, 2011-2016). During these periods, the price of gold often goes down. Gold's valuation isn't defined by global events, political conflicts, or industrial demand. Therefore, the only thing that investors should monitor in order to understand where gold is going is the exchange rate of the US dollar.
USD's purchasing power keeps diminishing in the long run, though this process is permeated by short-term periods of stabilization and strength. At the same time, the USD price of gold reflects the real state of the US currency. Interestingly, gold prices tend to grow with a lag, meaning that they reflect the changes in the dollar's purchasing power that have already happened.
The real value of gold is constant, but its price changes following the real purchasing power of the US dollar. Gold price tends to grow faster following a period of accumulation after some years of higher inflation. If you want to understand gold prices dynamic better, you need to know what's going on with the dollar. Price changes themselves don't mean anything — they only point to what is happening with USD.
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