Gold and the US Dollar – A Longstanding Relationship

The relationship between gold and the US dollar (USD) can be traced back through the ages, with the so-called “Gold Standard” referring to a global monetary system that pegged the value of fiat currencies directly to gold.

While this ended in the UK in 1931, it subsequently evolved into the Bretton Woods System. This was a collective international currency exchange regime that ran until the 1970s, and required a currency peg to the USD (which in turn remained pegged to the value of gold).

In this post, we’ll explore the current relationship between gold and the USD, while asking how these two assets often work inversely to one another.

Appraising These Assets as Secure Stores of Wealth

Interestingly, these assets are bound by the fact that they’re both considered to be relatively secure stores of wealth in their particular markets.

In the case of gold, for example, the value of this asset is known to appreciate during times of economic tumult, creating a relative safe haven in which traders can invest their capital for an indefinite period of time.

In the highly leveraged and volatile world of forex, the US dollar is considered to be one of two safe haven currencies. 

The Japanese yen is another, which is why the USD/JPY remains one of the most voluminous currency pairings in the world (particularly during times of economic tumult).

Does Gold and the USD Have an Inverse Relationship?

If you’ve studied the performance of these assets over time, you may be aware that they’ve developed an inverse relationship over time.

So, while both are considered to be secure stores of wealth that may offer value to investors during times of economic uncertainty, these assets often move in different directions to one another at specific points in time.

Of course, this trend isn’t as prevalent as it was during the Gold Standard, when the value of fiat currencies including the USD were directly pegged to that of gold. However, there remains a strong psychological nod towards golds when the value of the USD depreciates, as risk-averse traders move out of the forex market and seek out more tangible stores of wealth.

What’s more, a depreciating dollar increases the value of other major fiat currencies, optimising the demand for gold (and similar commodities) while sending prices soaring.

Why is Gold a Safer Bet?

While gold and the USD generally share an inverse relationship, it’s perfectly possible for the two assets to rise and fall at the same time.

Given the link between gold and the USD, why is the former largely considered to be the safer bet? Well, it’s a tangible and finite asset that cannot be replicated, while governments cannot simply print more (driving the process of devaluation in the process).

When purchasing gold, countries also tend to print more money, creating disparity between the value of the two assets.

Christopher Stern

Christopher Stern is a Washington-based reporter. Chris spent many years covering tech policy as a business reporter for renowned publications. He has extensive experience covering Congress, the Federal Communications Commission, and the Federal Trade Commissions. He is a graduate of Middlebury College. Email:[email protected]

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