Relation Between Dollar and Gold Prices
I was recently asked about how changes in dollar prices affect the gold. So, I thought of writing this short post explaining the relationship.
The gold prices and dollar generally trend in the opposite direction, i.e., they exhibit an inverse relationship with each other.
As the dollar weakens, the gold prices increase. This s because gold is denominated in US Dollars but widely used in global markets and by central banks of foreign countries. Gold has a long history of being used as a currency around the world and is still considered to be a safe heaven for investments whenever there are signs of economic downturn. So, when dollar is strong, investors tend to trade in dollar. However, when dollar starts to weaken during times of economic uncertainty, more and more investors shift their investments to gold for safety. This is a kind of wealth protection measure to hedge againt currency devaluation, inflation and deflation.
This inverse relation is not very apparent in the short term, but in the long term, such as 12 months or so, the trend can be easily seen.
However, this relationship is not always true as there are times when other factors could impact the prices of gold or the US dollar.
For example, both the gold and the dollar may go up during a crisis. During a financial crises, the Americans may but gold as a flight to safety. However, other countries consider US Dollar to be the safest currency and therefore may bid up US Treasury, which will result in dollar strengthening against all foreign currencies. As a result both gold and Dollar would have strengthened. So, under these unique circumstances, the negative may break.