HFM information and reviews
HFM
96%
FXCC information and reviews
FXCC
92%
FxPro information and reviews
FxPro
89%
FBS information and reviews
FBS
88%
Vantage information and reviews
Vantage
85%
MultiBank Group information and reviews
MultiBank Group
84%

The Relationship between Gold and the USD


If you have been reading our research articles, you must have seen that our analysts very often talk about the negative correlation between gold and the US dollar. In general, when the value of the dollar rises in relation to other currencies, the price of gold tends to fall in US dollar terms. This is because gold becomes more expensive in other currencies. Since gold is traded in dollars, it is usually said that a weaker dollar makes gold cheaper for other countries, which increases their demand for gold, and which in turn drives up the price, giving gold and the dollar their negative relationship. In this article, we look at this traditional theory, while also examining gold’s role as an international traded currency.

Trade weighted value of the dollar

When we talk about the trade weighted value of the dollar, we usually refer to the measurement of the foreign exchange value of the US dollar when it is compared against certain foreign currencies. Trade-weighted dollars lend weight to currencies most broadly used in international trade. These currencies form a group of major US trading partners and include: the Euro Area, Canada, Japan, Mexico, China, United Kingdom, Taiwan, Korea, Singapore, Hong Kong, Malaysia, Brazil, Switzerland, Thailand, Philippines, Australia, Indonesia, India, Israel, Saudi Arabia, Russia, Sweden, Argentina, Venezuela, Chile and Colombia.

The trade-weighted value of the dollar creates an index showing whether the dollar is gaining or losing purchasing power on average against its trading partners.When it comes to gold, the yellow metal has a negative relationship to the trade-weighted value of the dollar.

This means that when other currencies gain value against the dollar, so is gold. In this sense, gold acts like other currencies, so when the dollar loses value against most currencies, then it also loses value against gold. This highlights their negative correlation and not a fundamental relationship where the value of the dollar influences the value of gold.

Gold as an internationally traded currency

For many analysts, the negative correlation between the USD and gold is not due to the fact that movements in the value of gold are usually expressed in dollars. Instead, it is because gold is an internationally traded currency. As Fergal O’Connor and Dr Brian Lucey show in their article, “Gold’s negative relationship with the US dollar,” “on average, the value of gold expressed in a currency (e.g. the pound) would move with the value of other currencies expressed relative to the pound, their bilateral exchange rate.

This would then give us a negative relationship between gold expressed in terms of pounds and the trade-weighted value of the pound. ”As they argue, “For most of the time, the correlation between the returns on gold expressed in a currency and the returns on the trade-weighted value of that currency is negative, over 90% of the time for each currency.”

In this respect, the returns on gold in a currency have a “negative relationship with the currency’s trade-weighted returns over short, medium and long horizons.” For them, this demonstrates that the negative relationship between gold and the value of the dollar underlines gold’s role “as an internationally traded currency, rather than a way of explaining movements in the value of gold expressed in dollars.”

US Interest Rates

Another factor that influences the price of gold is US interest rates. Since gold does not yield interest it must contest with interest-bearing assets for demand.According to precious metals analyst, Kirill Kirilenko, gold‘s price skyrocketed, between 1971 and mid-1974, and again between 1976 and 1980, when the Fed increased interest rates to respond to high inflation. Gold’s performance was almost a result of its perceived status as a hedge against inflation.Increasing US rates most often offers support to the dollar and weighs on the gold price denominated in US dollar terms.

However, declining rates elsewhere could potentially make gold more attractive to both investors and consumers.There is also a psychological aspect to the value of gold, as during times of uncertainty or geopolitical turmoil, the price of the metal tends to rise as faith in governments wanes.

On the other hand, during peaceful times, the price of gold tends to fall.Nonetheless, gold retains its negative correlation to the US dollar, for the several factors outlined above, but most importantly as it is an international traded currency.


RELATED

Libertex: Tesla Stocks. Should You Buy and Trade?

Tesla is a well-known company. It's famous for its outstanding, high-tech products. When people hear Tesla, they think about something modern, going to the future...

Crypto trading: what are cryptocurrencies?

Cryptocurrencies are digital money, which represents a class of assets that do not exist in physical form but are created virtually through computer technology...

Discover how to trade commodities CFDs in 2020

Learn the basics of how to trade commodities CFDs. Discover types of commodities trading (precious metals, energy, food crops) and commodity brokers...

What are binary options in the global financial market

In the global financial market, as in many other areas of commercial activity, there are often categories that seem to the uninitiated person very difficult to understand and use...

Exploring The Limitations Of Fundamental Analysis: A Comprehensive Perspective

Fundamental analysis is a method used to evaluate securities by examining the underlying factors that influence their intrinsic value. It involves analyzing both qualitative...

The Complexities and Nuances of Touch Trading: A Comprehensive Analysis

Touch trading, a strategy employed in the volatile world of forex trading, is a sophisticated approach that requires traders to enter the market at a precise intersection of live price impact with a predetermined price level...

How to Trade Cryptocurrency Like a Boss

In 2009, bitcoin was relatively worthless, and as such, nobody was interested in knowing how to trade bitcoin. But a decade down memory lane, cryptocurrency is...

Ethereum trading in 2020: step-by-step guide

The Ethereum cryptocurrency is an open software platform based on blockchain technology that allows developers to create and release decentralized applications...

How to Assess PAMM Account

PAMM Account Monitoring Service provides an extensive overview of tools for analyzing the work of managers. In general, all monitoring...

Digital currencies as financial instruments

Digital currencies are computer files that are stored in distributed databases that communicate over the internet. They can only be accessed or used through...

Forex Carry Trading: A Comprehensive Guide for 2023

As the echoes of the 2008 financial crisis still resonate, the world is now grappling with a new economic challenge: swift inflation. This inflation surge has brought the carry trade back into the limelight...

What is the Metaverse? The future of the internet

When Mark Zuckerberg announced that he’s turning Facebook into a metaverse company and changed the company's name to Meta, the metaverse quickly became...

What is PMAM Software

To start with, a trading platform is a software system that allows people to trade various financial assets. It enables investors to open, liquidate, and manage market positions...

PAMM Account: Recovery Factor

One of the most important indicators of the reliability of the trading system used in the PAMM-account is the recovery factor. It is this factor that investors...

Taking Advantage on A Bearish Market

Shorting a stock has been popular and widely accepted investment strategy in past years. It had become increasingly globally known when...

The Nine Biggest Risks Of Trading Cryptocurrencies

While the cryptocurrency space has become an increasingly exciting one, and more and more mainstream, it is still a new space that comes with certain risks...

How Is the Bitcoin Price Determined?

To be a profitable trader of Bitcoin (BTC), you need to understand what determines the Bitcoin price. The markets are much like many others, as they need to consider the supply and demand and adoption issues when it comes to BTC...

An Advanced Guide To Day Trading Crypto

With cryptocurrencies all over the news and making headlines in mainstream media for bringing early investors enormous gains, everyone wants a piece of the action...

What Is a Limit Order? How Does It Work?

One way that you can protect your account is by using what is referred to as a "limit order". These orders specify the most you are willing to buy or sell a security at

Forex Hedging: Shielding Your Business from Foreign Currency Risk

Forex hedging stands as a cornerstone of currency risk management, a strategic shield that businesses employ to safeguard themselves against losses arising from the unpredictable fluctuations in foreign exchange rates. In essence, it involves the acquisition of financial instruments or products to shield an enterprise from unforeseen shifts in exchange rates.

XM information and reviews
XM
82%
FP Markets information and reviews
FP Markets
81%
FXTM information and reviews
FXTM
80%
AMarkets information and reviews
AMarkets
79%
Octa information and reviews
Octa
79%
BlackBull information and reviews
BlackBull
78%

© 2006-2024 Forex-Ratings.com

The usage of this website constitutes acceptance of the following legal information.
Any contracts of financial instruments offered to conclude bear high risks and may result in the full loss of the deposited funds. Prior to making transactions one should get acquainted with the risks to which they relate. All the information featured on the website (reviews, brokers' news, comments, analysis, quotes, forecasts or other information materials provided by Forex Ratings, as well as information provided by the partners), including graphical information about the forex companies, brokers and dealing desks, is intended solely for informational purposes, is not a means of advertising them, and doesn't imply direct instructions for investing. Forex Ratings shall not be liable for any loss, including unlimited loss of funds, which may arise directly or indirectly from the usage of this information. The editorial staff of the website does not bear any responsibility whatsoever for the content of the comments or reviews made by the site users about the forex companies. The entire responsibility for the contents rests with the commentators. Reprint of the materials is available only with the permission of the editorial staff.
We use cookies to improve your experience and to make your stay with us more comfortable. By using Forex-Ratings.com website you agree to the cookies policy.