Is There a Correlation Between the US Dollar and Gold Prices?

The relationship between the U.S. dollar and gold prices has been a topic of speculation and debate amongst investors for decades. While many view these assets as being inversely related - where the rise of one triggers the fall of the other - the correlation is far more complex.

Over time, various economic factors, geopolitical events, and market dynamics have influenced this relationship and caused it to move in both predictable and unexpected directions. Whether you’re a seasoned investor or new to the world of precious metals, understanding this complex interplay is essential for making informed decisions.

In this article, we’ll explore the multifaceted relationship between the U.S. dollar and gold prices, looking at the nuances that drive their relationship and what it means for your investment strategy.

Is there a correlation between US dollar and gold price?

First thing’s first: there is no official relationship between the U.S. dollar and gold prices, although it might seem that way given that gold is usually denominated in U.S. dollars. In reality, the U.S. dollar is just one of several factors that influence the price of gold, including inflation, interest rates, and the laws of supply and demand.

Let’s take a closer look at the relationship between the U.S. dollar and gold prices.

The gold standard era

While many central banks around the world hold massive gold reserves - including the United States - none use actual gold to back their paper currency. But this wasn’t always the case.

Keep Reading: What Countries Have the Largest Gold Reserves?

In 1900, the Gold Standard Act established a fixed exchange rate between gold and U.S. dollars, directly linking the dollar’s value to gold. Under this system, the value of the dollar was set at $20.67 per ounce of gold, and the Federal Reserve - the United States central bank - was required to maintain this rate. This meant that the amount of gold held by the Federal Reserve determined how much money could be printed, directly influencing the country’s economic activity by controlling the money supply.

In 1971, the gold standard was abolished and the formal relationship between gold prices and USD came to an end. The U.S. dollar became a fiat currency - one that derives its value from government regulation and isn’t backed by a physical commodity - traded on foreign markets and used as a reserve currency by many countries around the world.

Each asset is now valued according to the laws of supply and demand, making the relationship more fluid and complex. That said, there is still a relationship between the two. In 2008, for example, the International Monetary Fund (IMF) estimated that 40-50% of gold’s price movements were dollar-related, with a 1% change in the effective external value of the dollar resulting in a 1% or more change in gold price.

Read More: What Drives the Price of Gold?

Negative correlation between U.S. dollar and gold prices

Ask most investors or financial analysts and they’ll tell you that gold and the dollar have an inverse relationship, meaning their prices move in opposition. This is true in many cases, but isn’t the result of an official relationship - more a byproduct of investor sentiment and economic factors.

While gold is usually denominated in U.S. dollars, it’s important to remember that the vast majority of the world is trading in their local currencies. This means that movements in the dollar’s value can affect investor sentiment by making gold cheaper or more expensive in their local currency.

Generally, the inverse relationship between gold and the U.S. Dollar Index (DXY) is as follows:

• When the value of the USD increases relative to other global currencies, gold’s price tends to fall. This is because the precious metal becomes more expensive in most of the world’s major currencies. As with any commodity, when gold’s price increases there tend to be fewer buyers, reducing demand and diminishing value.
• When the dollar decreases, the value of other currencies increases, making gold more affordable to foreign investors and increasing demand. The increased demand naturally means gold prices go up.

Similar Reading: ​​Why Central Banks Buy Gold

Positive correlation between U.S. dollar and gold prices

The inverse relationship has been well-documented, but here’s where it gets complicated: it’s not absolute and it’s also possible for the U.S. dollar and gold prices to increase in value at the same time. This is known as positive correlation.

The positive relationship between the dollar and gold prices is usually seen in times of market turmoil, geopolitical events, or political crisis. During these periods, investors flock to both dollars and gold for their ability to act as a safe haven.

Relationship between gold and USD in recent years

Let’s take a closer look at the relationship between gold and the U.S. dollar by exploring how they responded to recent world events, including the COVID-19 pandemic, United States and China trade war, and conflict between Russia and Ukraine.

In the early stages of COVID-19, the value of the U.S. dollar increased as investors flocked to its safety as a reserve currency. This had an inverse relationship on gold’s price and caused it to decrease. As COVID-19 continued to wreak havoc on the global economy, the U.S. Federal Reserve applied monetary policy measures to stabilize markets and the economy, including reducing interest rates and carrying out a bond-buying program. Because of these measures, investors switched to higher-yielding assets and the value of the U.S. dollar decreased. The dollar value decrease, in combination with investors seeking safe-haven assets during the pandemic’s uncertainty, led to gold prices increasing.

The trade war between China and the United States has also played a role in the dynamics between gold and the U.S. dollar. As tensions between these two countries escalated, more investors were drawn to gold as a safe-haven asset, driving up its price.

See: Exploring the Role of Gold as an Effective Hedge Against Inflation

Another recent event that has had significant effects on gold prices is the ongoing conflict between Russia and Ukraine. In 2014, when tensions first arose between these two countries, gold’s price increased dramatically and led to its highest price in six months. Like any other period of instability and uncertainty, many investors sought financial refuge in safe-haven assets such as gold and silver to hedge against geopolitical risks. Another reason for gold’s price increase is fear over disrupted supply, considering that Russia is one of the world’s largest producers of gold and silver.

What these three recent events show is that the relationship between gold prices and the U.S. dollar is complex and nuanced, influenced by numerous factors including economic policies, geopolitical events, and market sentiment. While the inverse relationship holds up in many situations, it’s not absolute and there’s always the chance of both gold and USD moving in similar directions.

Summary: Relationship between the U.S. dollar and gold prices

So, what essential takeaways should you keep in mind from this article? Let’s sum up the correlation between the dollar and gold prices for you to consider in your investment decisions:

In most cases, there’s an inverse correlation

You’ll mostly find that gold and the U.S. dollar move in opposition to one another. When the value of the U.S. dollar increases, gold’s prices will decrease and vice versa. This basic understanding can help you spot ideal opportunities to buy and sell gold.

See More: When is the Best Time to Buy and Sell Gold?

Take global events into account

As we’ve seen above, the inverse relationship isn’t the only factor to take into account. Global events like wars, political instability, pandemics, and more, can also affect the value of gold and the U.S. dollar. By staying informed of global events you can have a more informed understanding of gold’s price movements.

Add gold to your investment portfolio

According to the World Gold Council, physical gold acts as a natural hedge to the U.S. dollar. Gold’s inverse relationship with the dollar and other traditional asset classes, including interest-bearing assets, can help protect you against market volatility. Adding gold to your portfolio can help you spread risk, protect your investments, and retain purchasing power during periods of economic uncertainty.

Consider other precious metals

At the end of the day, gold is just one precious metal with intrinsic value. There are various other options that can diversify your portfolio, including silver, platinum, and palladium. Silver, especially, offers many of the same benefits of investing in gold but at a much lower price point. The more precious metals you add to your portfolio, the more you can reduce your exposure to market volatility and inflation while growing your wealth over the long-term.

See More: Why You Should Consider Silver Investment

Grow your portfolio with precious metals

If you’re ready to diversify your portfolio with precious metals, you’re in the right place. At StoneX Bullion, we offer a broad range of investment-grade gold, silver, platinum, and palladium bullion in the form of bars, coins, and wearable bullion jewelry. All our products are sourced from the world’s best-known mints, including the Perth Mint, Royal Canadian Mint, and U.S. Mint.

As an affiliate member of the London Bullion Market Association (LBMA), you can trust StoneX Bullion as your source of high-quality bullion investments. Whether you plan to invest in gold bullion bars for your future or a special coin to crown your collection, you’ll find it here at StoneX Bullion. Discover our range of precious metals and start growing your wealth today.