Analysis of the Relationship Between Gold Market Price and US Dollar

As a 'quasi world currency', the US dollar has a significant correlation with gold. To this day, the US dollar can still affect gold prices, and the two are mostly negatively correlated. What is the reason for this?

Gold and US dollars are both reserve assets

The US dollar and gold are both the most important reserve assets, but their nature is different. The US dollar belongs to paper currency and has no value, but holding it can bring interest income. Gold belongs to Precious metals and has high value itself. It also plays a role in avoiding inflation and risk, but holding gold cannot bring interest income. Therefore, investors will choose between the two based on political and economic situations.

The trend of the US dollar is positively correlated with the US economic situation, while the trend of gold is negatively correlated with the global economy. The United States is the number one economic powerhouse, and its economic development status will have a significant impact on global economic development; The price of gold is generally inversely proportional to the quality of the world economy. When the US economy is booming, the global economic situation is usually optimistic, which leads to a strong US dollar and weak demand for gold. On the contrary, when the US economy is weak, the global economic situation is usually not optimistic, which leads to a weak US dollar and strong demand for gold.

Gold is priced in US dollars

From the perspective of gold demanders, when the US dollar depreciates, that is, when the us dollar index falls, investors using other currencies such as the euro will find that when buying gold in the euro, an equal amount of funds can buy more gold, thereby stimulating demand, leading to an increase in gold demand, and ultimately driving gold prices higher. On the contrary, if the US dollar index rises, for investors using other currencies, gold prices become expensive, which suppresses their consumption and reduces demand, leading to a decline in gold prices.

From the perspective of gold producers, most gold mines are located outside the United States, and the US dollar index has had a certain impact on the interests of gold producers.

Because the production cost of gold mine is calculated in local currency and the gold price is calculated in US dollars, when the US dollar index falls, the local currency converted by exports decreases and profits decrease, which hits the enthusiasm of producers, and eventually leads to the decline of gold production, and the decrease of supply will inevitably raise the gold price.

From the historical trends of gold and the US dollar index, it can be observed that the two will show a similar trend. This is because the US dollar and gold are both safe haven tools. When the world political situation changes or the economy is unstable, investors will choose safe haven tools to avoid investment risks. The demand for gold and the US dollar as hedging tools has increased simultaneously, which sometimes leads to both gold and US dollar indices rising, resulting in a trend in which the US dollar index and gold prices move in the same direction.

Overall, there are three main reasons:

1. The United States has consistently ranked first in the world in terms of economic strength:

Since the end of the 19th century, the total GDP of the United States has surpassed that of the United Kingdom, becoming the "world's largest economic system" and lasted for 124 years. By 2017, the US economy accounted for about one-fifth of the global economy. Because of this, the world economy is deeply affected by it, and the price of gold is negatively correlated with the quality of the world economy.

2. The world gold market is generally priced in US dollars:

Therefore, the exchange rates between the US dollar and various currencies will inevitably affect the trend of gold prices.

3. As the US dollar and gold are both important reserve assets of central banks in various countries, if the US dollar index performs strongly, it will to some extent weaken gold as a reserve asset. Play a role in maintaining value.

Investors should note that in recent years, due to the rapid development of countries such as China and India, the world economic landscape has gradually changed, and the United States' dominant position in the world economy has been challenged by multiple parties. The position of the US dollar as a reserve asset that is equally important to gold is no longer firm.

Many countries have gradually promoted the diversification of reserve assets to avoid the risks brought by the depreciation of the US dollar. In addition, due to factors such as the international economic and political situation, the correlation between the US dollar and gold has gradually weakened, but a negative correlation has always existed.

【 EBC Platform Risk Reminder and Disclaimer 】: There are risks in the market, and investment needs to be cautious. This article does not constitute investment advice.