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Gold, Dollar and Inflation

Published by Martin Karus in category Precious Metals on 04.04.2022
Gold price (XAU-EUR)
1 731,55 EUR/oz
  
- 0,96 EUR
Silver price (XAG-EUR)
20,05 EUR/oz
  
+ 0,15 EUR

Inflation is a concept used by economists to describe how money/currency loses its value over time, causing prices to rise. How can we prevent our economies from depreciating in value? There is a color to the answer, and that color is gold.

Of course, it is a bit of an oversimplification to say that “inflation” is just that, the increase in prices is not global as there is also a variation in each sector. But, for the average person, it is the only relevant concrete manifestation of the various economic phenomena and mechanisms.

The Dollar

The US dollar is the reference currency for international transactions and trade.

The price of the US dollar has a considerable impact on the world’s financial markets and, consequently, on the price of gold. US economists use the “trade-weighted dollar index”, which is calculated from the currencies of twenty-six foreign countries representing 90% of US trade, to measure the purchasing power of the US dollar.

As gold is considered a safe haven, its price has an inverse relationship with the price of the US dollar, which is also considered an asset.

When the US dollar depreciates it becomes less attractive to investors, who then turn to gold, which tends to increase its price. When the dollar appreciates, therefore, the price of gold tends to fall.

Furthermore, one of the reasons for the negative relationship between gold and the US dollar is that gold is denominated in US dollars so that changes in the exchange rate are instantly reflected in the price of gold.

In other words, a rise in the value of the US dollar makes it more expensive to buy gold and thus reduces demand for yellow metal in the rest of the world. Consequently, this situation puts downward pressure on the gold price

A Widely Accepted Correlation

In the past, it was often observed that when the US currency fell, the gold price rose and vice versa. This correlation was also verified in other currencies due to exchange rates, so much so that this correlation has long been recognized for its reliability.

However, in recent years it has become less and less obvious, gradually being replaced by another correlation: that between US interest rates and gold prices. This is at least what the World Gold Council’s analyses have recently shown. Against all expectations, it would seem that the dollar is gradually regaining its place as a reliable indicator of the direction of gold prices.

Reliable Indicators 

It is true that rising US interest rates have not always indicated a downward movement in gold prices. It would seem that a combination of interest rates and the dollar can be indicative of the direction of prices in the short to medium term.

However, instead of the latter two, it would seem more appropriate to focus on latent market uncertainty and the risks that drive it, but also the positioning of capital flows and their density. The growth of the high-tech and jewelry sectors is also significant for the demand for precious metals, as are the opportunity costs between profitable assets and gold as a safe haven and therefore non-yielding asset.

Inflation, Interest Rates, and the Gold

Alongside these indicators, the threat of inflation, which often occurs in response to monetary policy, and the spread between the US and foreign interest rates remain strong indicators. However, the World Gold Council insists that in addition to the dollar and inflation or inflation fears, market uncertainty and flow positioning will be relevant indicators.

Gold price (XAU-EUR)
1 731,55 EUR/oz
  
- 0,96 EUR
Silver price (XAG-EUR)
20,05 EUR/oz
  
+ 0,15 EUR

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