Gold has tried to break above the $1,300 handle several times in the last few days. Ultimately, gold bulls have failed to break above that level, and the price retraced to $1,276 early this week. If you're trading gold, always pay close attention to the US dollar index. Notice today's Spinning Top pattern on the USD index, combined with the horizontal resistance. On the Gold chart, notice the trendline support and the newly-formed rectangle consolidation pattern. A falling US dollar causes the price of gold to rise, and vice-versa.
Just like the US dollar, gold tends to appreciate in times of political uncertainty and economic slowdown. Those assets are called safe-havens, and also include the Japanese yen and Swiss franc from the group of major currencies. However, the dynamics behind the demand for the US dollar and gold in times of a risk-off market environment are quite different, which can lead to an actual inverse relationship between those two assets.
While the US dollar usually appreciates as a store of value when the stock and bond market doesn’t generate adequate returns for investors, leading to a conversion of their stock and bond investments back into the US dollar and pushing its demand, gold exhibits a different pattern. The yellow metal serves as a safe place of last instance until investors are ready to take on riskier investments again.
This pattern of collective market psychology can be identified during the economic slowdown from 2008 to 2011. The US dollar Index – which reflects the value of the US dollar against a basket of other major currencies – rose sharply over the course of 2008 while the S&P 500 Index lost almost half of its value during the same period of time. Stock investors were selling their stock portfolio in exchange for US dollars, which in turn pushed the currency higher.
Interestingly, gold lost almost 30% of its value during 2008, only to skyrocket from 2009 to 2011 to an all-time record high of $1,895 in September 2011. Worries over the US debt and the European Greek-crisis saw hordes of investors selling the US dollar and euro and fleeing to the safe-haven of gold. Consequently, the US dollar Index reached a three-year record-low in 2011.
With the majority of gold still traded in US dollars, it’s no wonder that the exchange rates between US dollars and other currencies have a great impact on the price of gold, creating an inverse relationship between them.
Most of the time, all commodities that are denominated in US dollars (including oil, silver, copper etc.) move in the opposite direction than the US currency. The reason behind this is rather simple. Beside the market dynamics of an economic slowdown mentioned above, a stronger US dollar leads to weaker currencies in the rest of the world, decreasing the demand for gold and its price in dollar terms. Similarly, a weakening dollar leads to relatively stronger foreign currencies, which pushes the demand for gold and increases its price in dollar terms. A stronger US dollar lowers the price of gold on foreign markets, and vice-versa.
Another reason for the inverse correlation between the US dollar and gold is closely related to gold’s role as a safe-haven of last instance. Basically, in times of a weakening dollar, investors are leaving dollar-denominated securities and the dollar itself, and start buying gold as an alternative investment to store value and preserve the purchasing power of their investments. As the supply of gold is naturally limited, the increased demand can lead to large price fluctuations to the upside.
Just like the US dollar, gold tends to appreciate in times of political uncertainty and economic slowdown. Those assets are called safe-havens, and also include the Japanese yen and Swiss franc from the group of major currencies. However, the dynamics behind the demand for the US dollar and gold in times of a risk-off market environment are quite different, which can lead to an actual inverse relationship between those two assets.
While the US dollar usually appreciates as a store of value when the stock and bond market doesn’t generate adequate returns for investors, leading to a conversion of their stock and bond investments back into the US dollar and pushing its demand, gold exhibits a different pattern. The yellow metal serves as a safe place of last instance until investors are ready to take on riskier investments again.
This pattern of collective market psychology can be identified during the economic slowdown from 2008 to 2011. The US dollar Index – which reflects the value of the US dollar against a basket of other major currencies – rose sharply over the course of 2008 while the S&P 500 Index lost almost half of its value during the same period of time. Stock investors were selling their stock portfolio in exchange for US dollars, which in turn pushed the currency higher.
Interestingly, gold lost almost 30% of its value during 2008, only to skyrocket from 2009 to 2011 to an all-time record high of $1,895 in September 2011. Worries over the US debt and the European Greek-crisis saw hordes of investors selling the US dollar and euro and fleeing to the safe-haven of gold. Consequently, the US dollar Index reached a three-year record-low in 2011.
With the majority of gold still traded in US dollars, it’s no wonder that the exchange rates between US dollars and other currencies have a great impact on the price of gold, creating an inverse relationship between them.
Most of the time, all commodities that are denominated in US dollars (including oil, silver, copper etc.) move in the opposite direction than the US currency. The reason behind this is rather simple. Beside the market dynamics of an economic slowdown mentioned above, a stronger US dollar leads to weaker currencies in the rest of the world, decreasing the demand for gold and its price in dollar terms. Similarly, a weakening dollar leads to relatively stronger foreign currencies, which pushes the demand for gold and increases its price in dollar terms. A stronger US dollar lowers the price of gold on foreign markets, and vice-versa.
Another reason for the inverse correlation between the US dollar and gold is closely related to gold’s role as a safe-haven of last instance. Basically, in times of a weakening dollar, investors are leaving dollar-denominated securities and the dollar itself, and start buying gold as an alternative investment to store value and preserve the purchasing power of their investments. As the supply of gold is naturally limited, the increased demand can lead to large price fluctuations to the upside.