What is the relationship between Gold prices and US Dollar?

Key Takeaways:

• Gold has been amongst the oldest means of exchange known to the human race.
• In the Bretton Woods Agreement it was agreed that gold was the basis of the US dollar. Other currencies worldwide were attached to the US Dollar’s values.
•  Gold and US dollar are inversely related.

Introduction:

Yellow metal gold has been amongst the oldest means of exchange known to the human race. It has been a commodity and currency. Even today, gold is regarded as an extremely desired asset. As a commodity, the value of gold is determined based on its demand, supply, and market sentiment. Not only as a commodity or currency, but gold is also considered as an honour in the form of gold medals. Gold continues to be a mode to understand the market sentiment. Countries around the world keep gold as reserves, which indicates the importance of this metal.

During periods of uncertainty, we often hear about the news related to the US dollar and gold prices. Many experts say that the price of gold increases when the market is extremely uncertain. We also see the US dollar getting impacted. However, there are other factors as well that impact the dollar value which include monetary value, rising inflation, demand for currency, economic growth and export prices.

However, in this article, we will be looking at the relationship between the US Dollar and Gold. But before that let’s understand the background by knowing the Bretton Woods Agreement:

Bretton Woods Agreement:

Bretton Woods Agreement was negotiated in July 1944 from 44 nations at the United Nations and Financial Conference held in Bretton Woods. Under the Bretton Woods system, gold was the basis of the US dollar and other currencies were attached to the US Dollar’s values. The 44 nations met in order to prevent devaluation of currencies and promote international economic growth. The Bretton Woods Agreement created two organisations IMF and the World Bank. Although the Bretton Woods Agreement ended in 1970s, these two organisations IMF and the World Bank still exist which remains a strong pillar for the exchange of different currencies globally. They also support countries that require monetary support.

In the Bretton Woods Agreement, it was agreed that the US Dollar would be the medium of exchange for any international transaction. Also, the countries in this conference had the option to exchange dollars by the end of the year with the equivalent value of gold through IMF.

Since the US Dollar is the benchmark price for gold. Any changes in the gold value will impact the US Dollar and vice versa. In case the price of gold will increase, we need to pay more US dollars to purchase gold.

The next question which automatically pops in is how are the US dollar and gold prices related?

Co-relation between Gold and the US Dollar:

To understand this relation, we need to first know that both gold and the US dollar are regarded as Safe haven instruments. By safe haven, it means that if we invest in these assets, then over the period, the investment will keep its value.

In case of economic downturn, investors tend to invest in gold as they know that within a couple of years they will be able to make profits from them. It is important to remember that a falling dollar increases the value of other currencies. This increases the demand for gold. Thus, increases the price of gold. 

In this case when the value of the dollar decreases, the value of currencies of other countries increases. As a result, the demand for commodities like gold increases. Thus, the price increases.

Also, when the US dollar lose its value, then investor can choose alternate investments like gold to store value.

Exception:

We generally say that gold and the US dollar are inversely related. However, it is possible that both may increase simultaneously during the period when there is a crisis in some other country or region. In such case, investors generally opt save haven assets like US Dollar, gold etc.

Factors influencing gold prices:

• Inflation and Deflation
• Greed and fear
• Supply and demand

How gold affects currencies?

• Gold is used to hedge against inflation
• The price of old impacts the countries that import and export gold.
• Gold purchase tend to reduce the value of currency used to purchase

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