Historically, the relationship between gold and the US dollar (USD) is inverse, i.e. when one increases, the other decreases. This association is affected by the following:
Inverse relationship
Gold demand decreases when the USD strengthens, because the USD is the way gold is priced globally. In addition, as demand falls, gold becomes more expensive in other currencies. The price of gold rises globally when there is a significant increase in demand due to a weakening USD.
Inflation protection
In the event of high inflation, people want to invest in something that looks like a good deal and gold is seen as a good investment during inflation years. This increases the demand for gold and ultimately raises its price.
Active shelter
Difficult economic times force investors to move away from riskier assets, such as stocks, and invest in gold, which raises its price. If confidence in the U.S. falls, then people will rely on gold instead of the dollar. This leads to less demand for gold when the U.S. economy is not doing well (as in these times with Trump), leading to an imbalance.
Interest rate and Federal Reserve policy
The decline in the USD occurs as interest rates rise, as well as during the time when investment is attracted. Gold prices also decline because the opportunity cost tends to be high without a significant return. When the Fed lowers the interest rate, the opposite happens: gold becomes more attractive.
U.S. debt and global confidence
A high level of debt in the U.S. can weaken confidence in the dollar, causing investors to turn to gold. If global investors view the U.S. economy as strong and stable, demand for dollars increases, pushing gold prices down.
Current market trends
The relationship between the dollar and gold is not always perfectly inverse. Short-term fluctuations can be influenced by central bank actions, global trade policies or investor sentiment. So, while not always a perfect indicator, the inverse relationship between the dollar and gold is something that most of the time can indicate and influence gold's movements.
Josh Perez
Managing Director
Chief of Global Trading