And although the United States does not have any plans to reduce its gold stores, the world's largest, economists within the Federal Reserve are tentatively exploring the case for selling. Right now the probability looks fairly low. There are still fans of gold who believe it is the best hedge against inflation or some catastrophic upheaval that would leave paper money diminished or valueless. Indeed, supply-side economists say the decline of gold's role has been vastly exaggerated and that the world still operates in some ways on a gold standard, with gold serving an informal but critical role as a gauge with which to measure the underlying soundness of currencies. But most analysts and economists believe that gold's importance has been permanently diminished.
Investors looking for a hedge against inflation, they say, can find all kinds of alternatives.
The owners of capital now judge the strength of currencies based on the soundness of the monetary and fiscal policies in the countries that issue them. Money, the experts say, flows readily into currencies that are judged sound by the market, and flows even more rapidly out of currencies seen to be undermined by weak policies. In the United States, Federal Reserve Chairman Alan Greenspan has gone a long way toward eliminating the threat of inflation. And since inflation was what drove many investors to hold gold rather than risk seeing the value of their paper currency deteriorate, gold has become correspondingly less attractive. At the same time, the relatively strong growth rates enjoyed by the U.S. economy as well as improvements on other fronts like the federal budget deficit have made the United States the most economically sound of the world's rich nations.