Historically, the relationship between gold and the US dollar (USD) is inverse, meaning that when one rises, the other falls. This association is affected by the following:
Inverse relationship
Demand for gold decreases when the USD strengthens, because the USD is the currency in which gold is traded globally. Furthermore, 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 of the USD.
Inflation protection
In times of high inflation, people want to invest in something that seems like a good deal, and gold is seen as a good investment during years of inflation. This increases demand for gold and ultimately raises its price.
Safe haven asset
Times of economic hardship force investors to move away from riskier assets, such as stocks, and invest in gold, which raises its price. If confidence in the US falls, then people will trust gold instead of the dollar. This leads to lower demand for gold when the US economy is not doing well (as in these times with Trump), causing an imbalance.
Interest rates and Federal Reserve policy
The decline of the USD occurs as interest rates rise, as well as during times when investment is attracted. Gold prices also decline because the opportunity cost tends to be high without significant returns. When the Fed lowers interest rates, the opposite occurs: gold becomes more attractive.
US debt and global confidence
High US debt levels can weaken confidence in the dollar, causing investors to turn to gold. If global investors believe the US economy is 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 it is not always a perfect indicator, the inverse relationship between the dollar and gold is something that can most of the time indicate and influence gold's movements.
Josh Perez
Managing Director
Chief of Global Trading