If you’ve been following the gold and currency markets lately, then you’ve likely noticed that the US dollar and gold prices have a strange habit of trending in the opposite directions.
For instance, at the start of September, the precious metals sector took a sharp turn downward in response to a breakout in the dollar index. Conversely, the escalation of conflicts around the world and a number of recent hiccups on the road to full economic recovery here at home have slowed market growth and held gold relatively steady throughout the historically slow summer season.
So what causes this movement and why? These are important questions to ask. By understanding the ins and outs of the intricate dollar-gold relationship, investors can learn to predict when an inverse correlation will be triggered and how to use this knowledge to their benefit.
Before we explore the correlation between currency and gold, first you might find it helpful to take a quick moment to learn about its past by reading a brief history of the American gold standard in one of our previous posts.
Also, check out our article Buying Gold as a Hedge against Currency Depreciation for more about recent trends in the dollar-gold relationship.
The Inverse Relationship
Ever since the US dollar was taken off the gold standard in 1971, the currency has fluctuated much more violently and often. Meanwhile, the value of gold remains stable, providing investors with a hedge against inflation and a refuge in times of economic uncertainty.
If the value of gold is so stable, then why does its price fluctuate so much?
Good question. Although the value of gold continues to hold steady in comparison to other currencies, its market price in any given currency rises and falls as the perceived value of that currency changes. In other words, when confidence in the US dollar plummets, its value does too—meaning it requires more currency to purchase the same amount of gold. Of course, the opposite holds true as well, which is why the price of gold tends to behave inversely to the value of the US dollar.
To say the price of gold and the value of the US dollar are inversely linked is true most of the time – however, this is not a steadfast rule. The relationship between the dollar and gold is more complicated than that.
Historically, gold and the dollar tend to move in opposite directions, but occasionally external factors will impact the price of these two investments uniquely. For example, the monetary system in another country may undergo a crisis, in which case foreign investors would likely flock to both US dollars and gold in order to seek out stability. In this situation, both the dollar and gold would experience upward growth simultaneously.
Likewise, in a recession, some people may consider gold a safe haven and invest heavily in the yellow metal, while others might view the dollar as the better investment—resulting in the values of both options going up.
Fortunately, while the intricate details of the dollar-gold relationship can be confusing, for investors the application of this knowledge is clear and simple: Invest in gold if you don’t believe in the long-term stability of the dollar.
Preserve your wealth and grow your financial portfolio by purchasing gold bullion through Provident Metals today.
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