The Non-Existent Link Between the Dollar and the Price of Gold

Posted on December 15, 2022

A fairly 101 piece about gold on The Balance has a note that even experienced gold investors might not be aware of.

"The prices of gold and the dollar may often appear to oppose each other due to investor sentiments and economic factors, but there is no set or official relationship between the two."

As bullion dealers with some degree of knowledge, we can affirm this is true. There is no formal link between the U.S. dollar and gold, nor has there been one for over 50 years. And yet this year, more than most in recent history, has made everyone wonder how this is possible.

The more months pass, the more it is becoming abundantly clear that gold's current price is a disease caused by the U.S. dollar. Now, let's be clear: the metal is doing well year-on-year, and has had astounding three, five and further-back stretches. It did climb from a lengthy rout of around $1,600 to around $1,750 in short order. But realistically, these valuations do not reflect market sentiment.

Uncertainty is contending for its highest spot ever, particularly that related to inflation. In a strange sense, the certainty within the uncertainty is actually benefitting the safe-haven more: inflation is one thing we're all certain about, it's just the "how much" and "when" that isn't clear. Though plenty of it already is. Still, the metal isn't outperforming.

This shows us just how important the invisible tie between the U.S. dollar and gold is. Because if we gloss over briefly over the currency index, we see that the U.S. dollar remains appreciated against world currencies year-to-date. And yet, over the past few weeks, it has lost anywhere between 2% to 7.8% against various fiats. In the last four weeks, the U.S. dollar was beaten especially badly by the Japanese yen, with it being the second best performing currency against the greenback.

What has happened over the past four weeks in the gold market? Oh, there was that precipitous and firm jump above $1,700.

What has the Japanese yen done to year-to-date? Inflate and allow Japanese gold investors to post massive gains. If you happened to purchase gold in yen a year ago, your gains are far, far higher than if you did the same in the U.S. dollar.

These simple figures tell us just how strong the correlation between gold and the U.S. dollar is, specifically the dollar's performance against other currencies. A strong U.S. dollar is meaningful enough to keep all the bullish drivers gold could hope for dormant. And the moment this dollar shows weakness, the market springs up and acts accordingly.

Should gold investors be dissatisfied? After all, gold has everything going for it right now, and an investment in gold is timely and prudent. But we could be in an alternate reality of strong, growing economies, value-backed currencies and certainty. An environment where gold seems to fester. And it would seem that gold would care not.

As it happens, the things gold has going for it right now are called fundamentals. Whatever is currently moving the price of an asset, its fundamentals are what you want to be sound the most. Whiplashes are akin to the boat being rocked, while bad fundamentals equate holes in the vessel. So fret not, investors of the sound: if recent weeks are any indicator, you might not need to wait that much longer for your ark to do what it's supposed to.