What Strong Gold Says About The Weak Dollar: An In-Depth Analysis On Gold Prices

As someone who closely monitors the financial market, I have observed an interesting relationship between gold and the US dollar. When the value of the US dollar declines, I am seeing the price of gold often increase, and vice versa.

You can see the example above in the chart above is Gold vs. US Dollar futures. This inverse relationship between gold and the US dollar has caught my attention, and I’d like to share my insights on the subject and answer some common questions.

There are a lot of factors that affect gold prices and I want to be 100% clear we are not covering all of them in this article, nor do I think it is possible.

My goal is to explore (in a balanced way) the recent gold prices along with US Dollar and other factors in Gold prices minus drama seen elsewhere.

I am not a “gold expert” and only giving the perspective of a guy that reads way too much about financial markets and geopolitics. And yes, I do trade gold, gold futures, options, etc.

This should not be construed as “financial or tax advice” and I recommend you seek professional advice before making any investment decisions.

Here is brief summary of the article:

  • šŸ“ˆ When the value of the US dollar declines, the price of gold often increases, and vice versa due to an inverse relationship between gold and the US dollar.
  • šŸŒŽ Many nations seek alternatives to the US dollar, and gold is a prime example, having risen 20% in just half a year, with central banks accounting for a record 33% of monthly global demand for the metal.
  • šŸ’° Gold is often viewed as a safe haven during economic uncertainty or when confidence is lost in fiat currencies, driving up its price.
  • šŸ“Š Interest rates, macroeconomic events, and geopolitical events can influence the price of gold and the value of the US dollar.
  • šŸ’ø A weak US dollar can impact various aspects of the economy, including causing inflation and leading to higher prices for commodities, gasoline, travel, and products manufactured from imported goods.
  • šŸ’° Historically, rising interest rates can put downward pressure on gold prices because they increase the opportunity cost of holding non-yielding assets like gold.
  • šŸŒ Geopolitical events and financial crises can also affect the relationship between gold and the US dollar, as investors may turn to gold as a safe haven, pushing up its price.
  • šŸ“ˆ Geopolitical events and financial crises often increase the value of gold as a safe-haven asset.
  • šŸ“‰ Rapid gains in gold prices driven by geopolitical events may be temporary and prices may return to pre-crisis levels once tensions ease.
  • šŸ’° Gold price prediction during uncertain times often relies on various explanatory variables.
  • šŸ›ļø There are multiple ways to invest in gold, including physical gold, gold stocks, gold ETFs and mutual funds, gold futures, gold jewelry, and gold-related companies.
  • šŸ¤” The relationship between gold and the US dollar is complex and driven by various factors, such as interest rates, inflation, central bank policies, and geopolitical events.
  • šŸ“š It’s important to stay informed about the latest market developments and trends to better understand the relationship between gold and the US dollar.

The Inverse Relationship Between Gold and the US Dollar

First, let’s discuss the obvious recent trend of why gold prices rise when the dollar weakens. When the value of the US dollar declines, it means that foreign currencies become relatively stronger.

As a result, people holding foreign currencies can buy more gold with their money, increasing the demand for gold. This increased demand results in a higher gold price.

You can see the chart at the top of the page show shows the current inverse relationship. Prices are based on Futures.

Another reason is that gold is often viewed as a safe haven during economic uncertainty or when confidence is lost in fiat currencies. This means that investors may flock to gold as a store of value when the dollar is weak, driving up its price.

Conversely, when the US dollar strengthens, the price of gold tends to decline in the chart. This is because a strong dollar makes gold more expensive for foreign currency holders, resulting in a decrease in demand and a drop in the gold price.

This doesn’t happen all the time but does appear to be going right now.

It’s also worth noting that various factors, including interest rates and macroeconomic events, can influence the price of gold and the value of the US dollar.

Let’s take a look at those.

Are Countries Rebelling Against The US By Turning to Gold?

Today, most experts agree that the US dollar is unlikely to lose its status as the world’s primary currency, as no viable alternative currently exists.

However, numerous nations actively seek alternatives, and such complacency could accelerate their search.

Presently, gold is the prime example, having risen 20% in just half a year. This increase in demand is not driven by typical investors seeking a hedge against inflation and low real interest rates.

Rather, central banks, significantly reducing their dollar holdings and searching for a secure alternative, are the main purchasers. Since record-keeping began in 1950, central banks have never bought more gold, now accounting for a record 33% of monthly global demand for the metal.

This surge in buying has pushed gold prices towards record highs, over 50% higher than predictions based on real interest rates, indicating new factors influencing gold’s value.

Examining top central bank purchases reveals that nine of them, including China, Russia, and India, are from emerging nations.

The BRICS nations, which include Brazil, Russia, India, China, and South Africa, are reportedly planning to establish a common currency in an attempt to decrease their reliance on the US dollar and challenge America’s dominance in global finance.

This move comes amid growing calls for de-dollarization from Russia and China in response to Western sanctions.

 Jim O’Neill, an ex-Goldman chief economist, has suggested that the BRICS group should expand to include emerging nations like Mexico, Turkey, Egypt, Indonesia, Bangladesh, Vietnam, Pakistan, and the Philippines to create a fairer, multi-currency global system.

This proposal seems to be in line with the BRICS countries’ ongoing efforts to create a more diversified and balanced global economy.

Part of the strategy for moving away from the dollar involves the BRICS nations buying massive amounts of gold, indicating their aim to hedge against potential economic instability and strengthen their financial reserves.

The new currency being developed by the BRICS countries could be backed by assets such as gold, additional rare earth metals, or other commodities.

Moreover, these moves have been seen as potentially benefiting both gold and the crypto space, as the global de-dollarization trend accelerates. Analysts suggest that these assets could stand to gain as the BRICS nations navigate their shift away from the US dollar.

I see that Gold, the oldest and most traditional asset, is being utilized by central banks as a form of rebellion against the dollar.

Historically, both the dollar and gold were considered safe havens, but gold is now considered safer. During the brief banking crisis in March, gold continued to rise while the dollar fell, marking the largest disparity between the two assets.

Why are developing countries challenging the dollar’s dominance now, given its status as the international trade standard since World War II’s end?

The answer lies in the US and its allies’ increasing use of financial sanctions.

Remarkably, 30% of all countries now face sanctions from the US, the EU, Japan, and the UK, a significant increase from 10% in the early 1990s.

Previously, most targets were minor, but when Russia invaded Ukraine, these powers quickly launched a comprehensive sanctions campaign, cutting off Russian banks from the dollar-based global payment system.

Suddenly, it became clear that any nation could be targeted. So we may be seeing countries create some buffers against US sanctions by buying gold.

However, despite these attempts by BRICS to decrease their reliance on the US dollar, most economists agree that the US dollar is not going away anytime soon.

It will be important to continue monitoring these developments and their potential impacts on global finance.

This brings me to look a Gold’s historical performance, and boy is it a rollercoaster.

Golds Past Performance

During the 2008 crash, I worked on a broker-dealer’s inside sales desk that an investment company owned. The parent company had a mutual fund that invested a large amount of assets in gold and, as a result, outperformed many other funds. 

Since then, I have not seen gold perform as well, so gold is not always a winner, and it does have some major swings.

Gold prices experienced a remarkable increase during the 1970s. At the beginning of the decade, gold was priced at $35 per ounce. This low price resulted from the Bretton Woods system, which tied the US dollar to gold and fixed gold prices. In 1971, President Nixon abandoned the gold standard, leading to a gold price surge.

By late 1974, gold peaked at $180 per ounce, a significant increase from its starting price. However, gold prices experienced a correction and fell nearly 40 percent to $110 in August 1976.

Despite the correction, gold prices resumed their upward trajectory, and by the end of the decade, gold had reached $850 per ounce. This represented an almost 25-fold increase from the beginning of the 1970s.

Several factors, including inflation, central bank buying, and geopolitical events, influenced the surge in gold prices during the 1970s. Inflation was particularly high during the 1970s, partly due to the cancellation of the Bretton Woods system.

Additionally, gold and silver generated phenomenal returns during the 1970s.

Currency Value and the Economy

It’s essential to understand that currency value is relative. The US dollar can be weak compared to one foreign currency while being strong relative to another country’s currency.

Looking at charts and historical data is helpful when assessing the relationship between gold and the US dollar. For example, a chart comparing gold prices and the USD/EUR exchange rate over a six-month period reveals that gold prices decreased as the dollar strengthened against the euro.

A weak US dollar can impact various aspects of the economy. For instance, a weak dollar can lead to higher prices for commodities, gasoline, travel, and products manufactured from imported goods.

Inflation is another factor that can weaken the US dollar. When there’s an increase in money supply due to excessive printing, the value of the dollar declines, causing inflation.

The Role of Interest Rates and Central Banks

The relationship between the Federal Reserve’s interest rates and gold prices is complex, and it depends on a variety of factors. That said, there are some key trends and patterns that can be identified.

Historically, gold prices have been sensitive to changes in the Federal Reserve’s interest rates. For example, in 2004, when Alan Greenspan raised rates, gold was at a low of $380 per ounce. However, in the following years, gold prices increased significantly, with a 400% increase to roughly $1,900 by 2011.

In general, rising interest rates can put downward pressure on gold prices because they increase the opportunity cost of holding non-yielding assets like gold.

One study published in the Chicago Fed estimated that a percentage point rise in the long-term real interest rate lowers the real gold price by 13.1%.

However, it’s not always the case that gold prices fall when the Fed raises rates. For instance, gold prices managed to rally by 400% through both rising and falling interest rates, reaching just above $1,900 an ounce in 2011.

And more recently, in March 2023, gold prices held well above $1,900 an ounce despite the Federal Reserve raising interest rates by 25 basis points and signaling further tightening.

Moreover, it’s worth noting that gold prices can be influenced by a variety of other factors, including inflation expectations, geopolitical tensions, and overall market sentiment.

For example, gold prices sometimes increase in periods of economic uncertainty or instability as investors turn to it as a safe haven.

In 2022, gold prices experienced a volatile downtrend for much of the year, from highs near $2,000 per ounce in March to a triple bottom around $1,630 in the fall. However, they seemed to rebound somewhat in 2023, holding above $1,900 an ounce in March.

Overall, while there is a relationship between the Fed’s interest rates and gold prices, it’s nuanced and can be influenced by a variety of other factors…including geopolitical events and crises.

Geopolitical Events and Financial Crises

The relationship between gold and the US dollar can also be affected by geopolitical events and financial crises. In times of political turmoil or economic uncertainty, investors may turn to gold as a safe haven, pushing up its price.

This can happen even if the US dollar remains relatively strong, as seen during the 2008 financial crisis when gold prices increased significantly despite the dollar’s strength.

Geopolitical events and financial crises often have a significant impact on gold prices. As a classic “safe-haven” asset, gold’s value tends to appreciate during periods of economic uncertainty and geopolitical instability.

A geopolitical event in itself may not be directly responsible for an increase in gold’s price. However, these events often trigger subsequent economic crises, such as oil shortages or inflation, that can drive up the value of gold.

Notable examples of such events are the Global Financial Crisis, the Asian Financial Crisis, the European Sovereign Debt Crisis, BREXIT, and the COVID-19 pandemic.

The price of gold tends to rise in the short term during geopolitical turmoil, as it is seen as a good hedge against uncertainty. However, history has shown that rapid gains in gold prices driven by geopolitical events will quickly fade once the tensions ease, and prices often return to their pre-crisis levels.

In times of financial and geopolitical uncertainty, gold price prediction often relies on various explanatory variables that serve as indicators of such crises.

For example, reasons such as fiscal and monetary reflation, investment demand, the bullish price cycle in gold, and geopolitical worries were expected to drive up gold prices in the years following 2009.

That said, the effects of geopolitical events can be complex and multifaceted. For instance, an analysis of 29 different geopolitical crises starting from WWII found that, on average, stocks were higher three months after a geopolitical shock.

This suggests that the impact on the broader financial markets, including gold, can be influenced by a wide range of factors beyond the immediate crisis.

In conclusion, while geopolitical events and financial crises are often associated with an increase in gold prices due to its status as a safe-haven asset, the precise impact can depend on various factors, and the effect may be temporary if the tensions or uncertainty ease.

Investors often turn to gold as a hedge during such times, contributing to its price volatility.

How do I Buy Gold?

Many people, including my mother, have asked me about gold, it is like a switch switched from tech IPOS, to gold. One of the frequent questions people are asking is “where to buy gold.

Frankly, I believe in diversifying assets, including precious metals, and trading them in my own accounts. This doesn’t mean it is the right thing for you.

In addition to being to buy gold in different ways, there are a lot of scams out there, so be careful where you invest and talk to several different companies to compare prices, quality, and customer service.

Before investing in gold, it’s essential to research and understands the different methods, associated risks, and potential rewards to make informed decisions based on your financial goals and risk tolerance.

Here are a few ways to buy gold:

  1. Physical gold: You can invest in gold bullion, which includes gold bars or coins. You can purchase physical gold through dealers. I recommend Augusta Metals. You can get a free gold and silver buying guide by clicking here.
  2. Gold stocks: Investing in the stocks of companies that mine, refine, and trade gold is another option. To buy gold stocks, you’ll need a brokerage account.
  3. Gold ETFs and mutual funds: You can invest in exchange-traded funds (ETFs) or mutual funds that focus on gold or gold-related stocks. This option offers exposure to gold without storing or managing physical gold.
  4. Gold futures: Investing in gold futures involves buying a contract to purchase gold at a specific price at a future date. This method is typically more suitable for experienced investors due to its complexity and potential risks.
  5. Gold jewelry: Although not a traditional investment method, purchasing gold jewelry is another way to own physical gold. However, remember that the gold content, design, and craftsmanship can significantly impact the value of jewelry.
  6. Gold-related companies: You can also invest in shares of gold mining companies or other gold-related businesses, providing indirect exposure to gold.

As mentioned above, Augusta Precious Metals is a great option if you are looking at putting gold or silver in a gold or silver IRA because:

  • Enjoy ZERO fees for up to 10 years
  • They boast an A+ BBB rating, proving our commitment to excellent service
  • Join thousands of satisfied customers who have given them 5-star rankings
  • Recognized by Money Magazine as ‘Best Overall’ in the industry
  • Endorsed by respected figures like Mark Levin, Jeanine Pirro, and Joe Montana
  • Have award-winning customer support and lifetime service for your account

You can get a free gold and silver buying guide (no obligation to buy anything) by clicking here.

Conclusion

In conclusion, the relationship between gold and the US dollar is complex, driven by various factors such as interest rates, inflation, central bank policies, and geopolitical events. A strong gold price often signals a weak US dollar, as investors may flock to gold as a safe haven or store of value when the dollar is losing ground.

However, it’s important to remember that this relationship is not always straightforward, and other factors can come into play. As an investor or an interested observer, it’s crucial to stay informed about the latest market developments and trends in order to better understand the intricate relationship between gold and the US dollar.

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