Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22
Best Metaverse Tech Stocks Investing for 2022 and Beyond - 14th Jan 22
Gold Price Lagging Inflation - 14th Jan 22
Get Your Startup Idea Up And Running With These 7 Tips - 14th Jan 22
What Happens When Your Flight Gets Cancelled in the UK? - 14th Jan 22
How to Profit from 2022’s Biggest Trend Reversal - 11th Jan 22
Stock Market Sentiment Speaks: Are We Ready To Drop To 4400SPX? - 11th Jan 22
What's the Role of an Affiliate Marketer? - 11th Jan 22
Essential Things To Know Before You Set Up A Limited Liability Company - 11th Jan 22
NVIDIA THE KING OF THE METAVERSE! - 10th Jan 22
Fiscal and Monetary Cliffs Have Arrived - 10th Jan 22
The Meteoric Rise of Investing in Trading Cards - 10th Jan 22
IBM The REAL Quantum Metaverse STOCK! - 9th Jan 22
WARNING Failing NVME2 M2 SSD Drives Can Prevent Systems From Booting - Corsair MP600 - 9th Jan 22
The Fed’s inflated cake and a ‘quant’ of history - 9th Jan 22
NVME M2 SSD FAILURE WARNING Signs - Corsair MP600 1tb Drive - 9th Jan 22
Meadowhall Sheffield Christmas Lights 2021 Shopping - Before the Switch on - 9th Jan 22
How Does Insurance Work In Europe? Find Out Here - 9th Jan 22
MATTERPORT (MTTR) - DIGITIZING THE REAL WORLD - METAVERSE INVESTING 2022 - 7th Jan 22
Effect of Deflation On The Gold Price - 7th Jan 22
Stock Market 2022 Requires Different Strategies For Traders/Investors - 7th Jan 22
Old Man Winter Will Stimulate Natural Gas and Heating Oil Demand - 7th Jan 22
Is The Lazy Stock Market Bull Strategy Worth Considering? - 7th Jan 22
METAVERSE - NEW LIFE FOR SONY AGEING GAMING GIANT? - 6th Jan 2022
What Elliott Waves Show for Asia Pacific Stock and Financial Markets 2022 - 6th Jan 2022
Why You Should Register Your Company - 6th Jan 2022
4 Ways to Invest in Silver for 2022 - 6th Jan 2022
UNITY (U) - Metaverse Stock Analysis Investing for 2022 and Beyond - 5th Jan 2022
Stock Market Staving Off Risk-Off - 5th Jan 2022
Gold and Silver Still Hungover After New Year’s Eve - 5th Jan 2022
S&P 500 In an Uncharted Territory, But Is Sky the Limit? - 5th Jan 2022

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

The U.S. Dollar Gold Inverse Relationship

Commodities / Gold & Silver 2009 Oct 15, 2009 - 07:08 AM GMT

By: Miles_Banner

Commodities

Best Financial Markets Analysis ArticleFor the past week the price of gold has performed well. It has maintained its historic high and risen fairly sharply after breaking the $1000 mark. The main reason gold has performed well is because of its inverse relationship with the US dollar. Time and again we see any weakness in the dollar play itself out in the strength of the gold price.


Today we look at the inverse relationship between the dollar and gold. Below courtesy of stockcharts.com I’ve overlayed the gold price (dotted line) against the us dollar index (solid black line).

As you can see at the start of the year, in what is a very rare occurrence, both rose together. This was a brief rally as people sort ‘safe havens’. Once the initial fear of the credit crunch was overtaken by the realisation of the government’s plans to print more dollars, the demise of the dollar takes hold in what can be seen as a long term bear trend.

The gold price differs. You can see the brief rally in February to March was followed by a decline but then a gradual, sustained rise from January onwards shows once again the strength of gold in the face of the US dollar adversity.

Just like at the start of 2009 there have been times over the past decades where gold and the US dollar have not reflected an opposition to one another… In 1978-1980, during the biggest rally in gold’s history, the US dollar traded sideways. In this case gold was being driven by people’s fear of the world’s monetary system falling apart. People fled from all paper currencies not just the dollar.

There is an element of 1980 in 2009. Much of the same fear about global monetary destruction drives the gold price higher today. The main difference is that now we see dollar reserves accumulated across the globe in huge numbers. This concentration of dollars is unsettling the risk analysts at major market players like central banks who are finally turning their heads to see what else they can accumulate to offset the risk of a falling dollar.

The reason for the inverse relationship between gold and the dollar

The reason for the inverse relationship between gold and the US dollar is because both are seen as a global, worldwide currency. Pre 1971 the two colluded as a world gold standard whereby the US dollar and gold were pegged together. At that time one Troy ounce of gold could be swapped for US$35. In 1971 Nixon separated the two and effectively began the chain of events that ended with a floated US dollar ( “Smithsonian Agreement”). This is a defining moment in the history of world economics. Before 1971 any central bank in the world could ask America to settle its debts in gold. Post 1971 they could only ask for US dollars.

What was the effect of decoupling the gold from the US dollar?

Central banks across the world started to stack more and more US dollars as this was the world reserve currency. As they did this the value of the dollar became imperative to the holders. Over many years the build up of dollars as a core part of the central banks reserves took hold. Today we have a world where there are far more US dollars in foreign bank accounts than there are in circulation in America.  As the central banks added dollars to their portfolio the value of those assets became more and more in the interest of every central bank around the world.  

Ultimately fears over the dollar’s instability are magnified by the quantity of holdings each central bank holds, hence the inverse relationship between gold and the US dollar is an effect of the popularity of the dollar as a world reserve currency.

The crippling nature of the central banks dependency on the US dollar is being debated amongst economists the world over. Currently we see various signs that the world is attempting to move away from its dependency on the US dollar but if the central banks stop buying US treasury yields and US dollars for their reserves the price of the US dollar could plummet.

If this were the case it could lead to the biggest implosion world economics has ever seen as more and more central banks, sovereign wealth funds, private funds and private investors sell to protect their portfolios. This is the risk.

Hedging against the dollar

With gold you have a global, accepted form of currency that has a limited supply. In this sense it makes a perfect hedge against the risk of the US dollar. Hence it is a far more obvious correlation to say that when the US dollar is weak gold is strong, whereas if gold is strong it doesn’t necessarily mean the dollar is weak.

Regards,

Digger
Gold Price Today

P.S Digger writes a weekly email analysing the gold price and the gold industry. Visit Digger at Gold Price Today (http://goldpricetoday.co.uk).

© 2009 Copyright Gold Price Today - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in