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Gold versus USD: gold and dollar correlation

Gold’s appeal and influence has a history spanning millennia. As an investment, it offers protection against inflation, currency debasement, market turmoil and global crises. It’s often used as a means to diversify investment portfolios, as it retains its value over the long run even as other markets boom or crash. Historically, one of the main disadvantages of holding gold was that it didn’t pay interest, and on top of that, you also had to pay for storage or even insurance when buying physical gold. With interest rates at historic lows in 2021, this is less of a concern now, as yields tend to be lower on other forms of investment as well.

Gold and USD correlation
Gold as a currency

For centuries, gold was synonymous with purchasing power and was the ultimate symbol of human achievement. Governments worldwide used the so-called gold standard to link the value of their currencies to gold. By now, the gold standard has been abandoned in favor of fiat money, which means a currency that is not backed by a physical commodity (i.e. gold or silver) but rather by the government that issued it. A fiat is a formal authorization or decree; hence the name fiat money, which means that the currency must be accepted as a means of payment at the face value determined by the government.
Even though it is no longer used as a form of currency and it doesn’t back currencies in developed nations, gold continues to have an impact on currencies around the globe. In a way, gold can be seen as an alternative currency that competes against other currencies. In addition, this precious metal is one of the few assets that can protect investors from the impact of currency depreciation, especially during times of massive money printing and near-zero interest rates.

Gold and USD correlation
Gold and dollar correlation

The correlation between the US dollar and gold is quite volatile and it can go in either direction as there is no formal relationship between the two. At a first glance, the connection may seem simple enough given that the price of gold is usually denominated in USD. Nevertheless, the dollar is only one of many factors affecting the price of this precious metal, with others including inflation, interest rates, as well as supply and demand on the global gold market.

For example, if real interest rates in the US rise, demand for the dollar also rises, and this in turn tends to lead to a drop in gold prices. This scenario is an example of negative dollar-gold correlation. As a general rule, when the price of the dollar rises against other currencies, the price of gold tends to move south in USD terms. Prolonged bull and bear markets in gold tend to coincide with the bear and bull trends in the US dollar.

We can speak of a positive correlation between gold and the dollar in times of market turmoil when both are regarded as a safe haven asset. 

Gold is also seen as a hedge against fiat currency debasement, which means the lowering of a given currency’s value, often via the printing of money by central banks. It's a widely accepted narrative on Wall Street that at times of excessive debt (such as in 2021 in the aftermath of the economic malaise triggered by the Covid-19 pandemic), fiat currencies like the US dollar will be debased, and precious metals like gold can offer some protection. 

 

Gold and USD correlation
Bottom line

Gold has been used as currency around the globe for centuries. During times of heightened uncertainty and market turmoil, the price of gold tends to rise. Gold has a key impact on the value of currencies around the world. Even though the gold standard is no longer in place, gold can act as a substitute for fiat currencies. The correlation between gold and the dollar is a complex issue with the direction of this relationship being dictated by a range of market factors.

Author of this article

Edith Balázs

Author of this article

Edith is an experienced financial journalist having worked for 15+ years as a correspondent for Bloomberg, Dow Jones and The Wall Street Journal covering macroeconomics, stock, currency and fixed income markets. She holds a master's degree in American Studies and Journalism.

Edith Balázs

Senior Editor

Edith is an experienced financial journalist having worked for 15+ years as a correspondent for Bloomberg, Dow Jones and The Wall Street Journal covering macroeconomics, stock, currency and fixed income markets. She holds a master's degree in American Studies and Journalism.

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