Gold vs Dollar

How does the correlation between gold and the dollar? Why is it the reverse?

Understanding the dynamics behind the correlation between gold and the US dollar may be useful to investors to understand the possible evolution of the two assets.

The inverse relationship between gold and the dollar protagonists, of course:

Gold – The most famous of hard assets and the performance of its listing is of great interest to the majority of investors.
the US dollar – the currency whose value determines the fate of the world economy, accounting alone for nearly half of the exchanges that take place daily on the Forex.
Both instruments are considered safe havens, namely investment solutions ideal in a climate of financial uncertainty and the markets, with the gold that is the first solution against inflation and the loss of value of money over time.

However, their performance follows very often opposite directions, described by an inverse correlation.

Let’s figure out the reason for this inverse relationship and how the gold and dollar trends could arise from each other.

Gold and the dollar, inverse correlation: the origins and historical
After the end of the Bretton Woods agreement in 1971, US President Nixon untied the dollar and gold fortunes, goods made independent of each other.

Until that time there was a close link between the two which sanctioned the value of the dollar on the basis of a given amount of gold given. A drop in gold reserves was causing thus an increase in the value of the dollar, according to a complete inverse correlation.

From after 1971, therefore, gold and the dollar followed divided streets, each with its own price, in a manner independent of the other.

The dollar is in fact tied to US monetary policies and events that affect them, while gold retains its properties as a safe haven against inflation.

The role of protagonists in the global economy that have carved the US has made the dollar the good ideal retreat for favorable economic situations.
On the contrary, in case of uncertainty or economic crisis and, more generally, of the value of the currency loss, gold becomes the number one objective.

This has characterized historical between gold and the dollar, leading to the inverse relationship they have always maintained.

The movements followed by two goods very often opposite directions, in reporting the fact that even today undertake the inverse correlation between gold and the dollar exists.

The current situation is that the main world economies weak and ailing, reason that determines the fashion gold back and research, from investors, the good more suitable shelter to maintain their value over time.

Gold and the dollar, inverse correlation Who determines? It is always valid?
The International Monetary Fund, in 2008, estimated that 40-50% of the movements in the gold price in the previous six years was driven by the performance dollar.

Between two goods, in fact, it is the dollar that plays the lead role.

It is the fate of the American economy and the strength of their currency to determine the trend of the gold price, which then plays the role of main alternative.

A depreciation of the dollar due to an increase in the value of other currencies, which in turn leads to an increase in demand (and price) of raw materials, including gold, also in demand as a safe haven.
Similarly it occurs in the opposite case.

The inverse relationship between gold and the dollar, however, does not exclude the possibility that the two goods can follow trends agree.

A crisis with respect to an outer region of the United States, for example, would lead to the search of both the dollar and gold as safe haven assets, leading to an increase in both prices.

It is therefore always advisable to think in function of the inverse relationship between gold and the dollar but without ever take that for granted.

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1 Response

  1. 03.09.2017

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