The fact remains that all transactions with gold; pricing and trading are done with U.S legal tender, and it’s not wrong to be inquisitive about the effect of each movement on another. One important thing to understand in this context is that increased U.S dollar value lowers the price of gold. Interchangeably, the high price of gold will be as a result of a drop in dollar value. Although, this inverse relationship isn’t always the case. It’s all about demand driven by global supply; we’ve had times when the U.S dollar and the price of gold have risen together.
For you to have an in-depth knowledge of the relationship of price pressures with gold, it wouldn’t be wrong to examine the different factors that influence currency prices. This means focusing on the factors limiting U.S economy and the major drivers. Rising real estate values, falling oil prices, positive jobs reports, and growing consumer confidence are all factors that can greatly improve the economy and in turn strengthen the dollar.
Let’s move on by looking at what happens when there’s a drop in U.S dollar and at a point resulting in economic uncertainty
Effect on investors
They run off to safe havens and look out for alternative investments. They may make a switch to tangible assets like real estate, precious metals, or other currencies affecting the alternative asset prices.
Even at that, the drivers always don’t work in correlation with each other. Complicating the relationship by contributing to the movements is the action of foreign countries and central banks. Foreign countries and central banks have been known to trade in other currencies, including U.S dollars, to edge their currencies or stimulate the economies.
Other patterns have sprung up; taking a look at the chart, the pattern between the gold prices and currency movement is not negligible. The comparison between the two is denoted by the DXY currency index measuring a trade weighed bowl of other important currencies and the dollar strength.
Currency vs. gold prices
The interesting part is that the inverse proportionality that exists between the price of gold and currency movement has not been so from time, and didn’t gain impetus until gold standard was suspended by the U.S in 1993- a lot of economists resolved to a common ground that got us out of the great depression. Still, under the standard, it’s value was linked directly to golds. Each dollar printed amounted to a certain cut of reserved gold that was sold and bought at a regulated price. Now, regardless of the agreement the U.S made with the gold standard under Roosevelt’s command in 1933, foreign governments were still allowed to do a paper exchange for gold till Nixon abandoned the system in 1971, bringing us down to a fiat and unbacked currency system.
The truth is, there are zero chances of us returning to the old system of commodity-backed currency tied to gold, which means the resource will not stop to reflect the strength and weakness of the U.S currency, the global demand for precious metals, and the economy as a whole. Summing this part up, this precious resource will continue to be treated as a hedge against devaluation of currency and ensure investors haven anytime there’s uncertainty, market turbulence or political instability.