Until the 1970's, the worth of a dollar was guaranteed by gold held by the federal government: backing known as The Gold Standard. The Gold Standard ensured that each dollar was secured by gold ensuring that the dollar kept its strong value. Interestingly, as a result of the relationship gold held a relatively low market value of somewhere between $20 and $30 dollars.
The Gold Standard was the norm for countries throughout the world in the early 1900's, but towards the middle of the 20th century countries began to discard The Gold Standard, leaving both the value of currency and the value of gold free to the open market. This new system became known as the "floating currency" system. With the floating currency system, depending on the state of the market, inflation, and demand, both the dollar and the value of gold can increase or decrease considerably.
Although gold and cash are not directly linked anymore under The Gold Standard, the markets account for a correlation between the two. Generally speaking, as the worth of currency goes down, the worth of gold goes up. In fact, one of the main influences on the price of gold is the strength of the dollar at any particular time. Other contributing factors that go hand in hand with this correlation are the stability of world and domestic markets, and general increases or decreases in demand for gold.
All of the factors that contribute to the fluctuating value of gold are so intertwined and interconnected that it is often hard to distinguish direct causation in any one area. In other words, the external factors contributing to one of these trends also influence and affect the others.
As inflation (defined as the value of money based on its buying power in the open market) increases, the value of money goes down, and tangible assets that have been established to hold "real" value tend to become more valuable to investors as people seek to lock in the value of their money. Since gold is, at its core, a natural element considered to hold "real" or "tangible" value, it is a constant that can be traded and holds true and consistent value throughout the world. Much as mathematics is seen as an international language, it can be said that gold is and has been one of very few international currencies for thousands of years. For this reason, it is less affected in the world market as currency-to-currency and currency-to-product values rise and fall. Although the value of the Pound to the Dollar may vary according to inflation and other external factor in the world market, gold remains a constant.
Inflation directly relates to the stability of world markets as the value of currency affects the buying power of individuals and the profitability of companies throughout the world. Beyond that, in recent history, buyer confidence in the stability of financial institutions and in the investments themselves has created instability in the market way beyond the typical fluctuation resulting from the value of currency and the profitability of companies which generally dictate the market. So now, more than ever, investors are turning to hard commodities such as gold that are seen as stable in a marketplace where people are losing money in areas previously seen as sure bets or instant money makers.
With both professional investors and the common public looking to put the money that they still have into a seemingly recession proof commodity, there has been a sharp increase in the demand for gold worldwide. This, of course, directly contributes to the increase in the cost of gold and the stability of it at the same time. Recent conditions in both the general market and the increasing decline of the Dollar domestically and abroad mean that the demand of gold is at its highest point in recent history. A commodity that was once valued $20 to $30 is now valued at upwards of $950. The rise in the price of gold and the continued upward or stable trend of the price means that the demand for gold and thus the prices of gold will likely stay where they are for some time.
All three of these factors have lead to a sharp increase to the value, but it is important to point out that although gold is and has been a highly valued and traded commodity on the open market, the market is cyclical and values do fluctuate over time. That said, when looking at and comparing the demand, stability, and values of various commodities over time there are few investments that offer the returns and comfort that can be found with an investment in gold.