June 5, 2019

The Relationship Between Gold and the US Dollar

Gold has a dual role as both a commodity and a currency. As a commodity, there are numerous industrial applications that give the precious metal intrinsic value. As a currency, it can be used as a method of wealth transfer or even as a hard currency in itself (no pun intended). Since gold is traded in US Dollars, gold can also act as a proxy currency trade. As a rule, when the value of the dollar increases relative to other currencies around the world, the price of gold tends to fall in U.S. dollar terms. It is because gold becomes more expensive in other currencies. As the price of any commodity moves higher, there tend to be fewer buyers, in other words, demand recedes. Conversely, as the value of the U.S. dollar moves lower, gold tends to appreciate as it becomes cheaper in other currencies.

Gold also is tied to interest rates. When interest rates move higher, the price of gold tends to fall, since it costs more to carry the metal. In other words, other assets (such as stocks) will command more demand because of their interest rate component.

You can see this relationship between Gold and the US Dollar in the charts below.

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about the author:

Mike Shorr

Since 1994, Michael has been an on-the-floor market maker, Vice-President of Interest Rate Derivatives for Knight Financial Products and Director of Education and Options Instructor at Trading Advantage. He makes the oftentimes complex world of options and trading accessible to the novice and advanced trader alike. Michael has a Bachelor of Science degree in Statistics and Finance from the University of Illinois Champaign-Urbana. He presently is Director, Trader Education at ProsperTradingAcademy.

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