Questrade - Empowering you to take control of your financial future. Join the journey!

---

What is the relationship between Gold and the US dollar?​

---

The relationship between Gold and the US dollar has a long and significant history, but it has changed dramatically over time and is complex today. Here's a breakdown:

Historically: The Gold Standard (Direct Link)
​

• For a long period, the US dollar was directly tied to gold. This was known as the Gold Standard.
• The value of the dollar was fixed in terms of a specific amount of gold (e.g., $35 per ounce).
• Under this system, central banks were expected to exchange currency for gold at the fixed rate.
• This provided a perceived stability to the dollar's value, as it was backed by a tangible asset.

The Shift Away (Breaking the Direct Link)

• The direct link to gold was gradually weakened and formally ended in the early 1970s under President Nixon (often referred to as the "Nixon Shock").
• Under the Bretton Woods system established after WWII, other currencies were convertible to the US dollar, and the dollar was convertible to gold for foreign governments at a fixed rate of $35/ounce.
• However, as the US printed more dollars than it had gold reserves to back at that rate, the system became unsustainable.
• The end of gold convertibility meant the US dollar became a fiat currency – its value is no longer backed by a physical commodity like gold, but by the trust and credit of the US government and the strength of the US economy.

Currently: An Often Inverse Relationship (No Direct Link)
​

• Today, Gold and the US dollar are largely separate assets, but they often have an inverse relationship. This means that when the dollar strengthens, the price of gold (priced in dollars) tends to fall, and vice versa.
• Why the inverse relationship?
  • Pricing: Gold is priced globally in US dollars. When the dollar strengthens relative to other currencies, gold becomes more expensive for buyers using other currencies, reducing demand and potentially lowering its dollar price. Conversely, a weaker dollar makes gold cheaper for international buyers, potentially increasing demand and raising its dollar price.
  • Alternative Investments: A strong dollar is often associated with a strong US economy and potentially rising interest rates (as determined by the Federal Reserve). Higher interest rates make dollar-denominated assets like bonds and savings accounts more attractive because they offer a yield. Gold, on the other hand, does not pay interest or dividends. When dollar assets offer good returns, the opportunity cost of holding non-yielding gold increases, leading investors to prefer dollars over gold. When the dollar is weak or rates are low, gold becomes more attractive as a store of value with no yield penalty.
  • Safe Haven Status: Gold is often seen as a "safe haven" asset during times of economic uncertainty, inflation fears, or geopolitical instability. When investors lose confidence in fiat currencies (like the dollar) or the stability of the financial system, they tend to buy gold, driving its price up. This can often coincide with a weakening dollar, or at least a decrease in confidence in its future purchasing power.
  • Inflation/Deflation: Gold is often considered a hedge against inflation. If investors fear the dollar's purchasing power will be eroded by inflation, they may buy gold to preserve wealth. Conversely, in deflationary environments or times of low inflation, the appeal of gold as an inflation hedge diminishes, potentially supporting the dollar's relative value.

Competing "Safe Havens"
​

• It's important to note that while gold is a traditional safe haven, the US dollar itself can also act as a safe haven currency during global crises due to the size and liquidity of US financial markets and the status of the dollar as the world's primary reserve currency. This can sometimes complicate the simple inverse relationship in extreme circumstances.

​
In Summary

The direct link between Gold and the US dollar via the Gold Standard is gone. Today, their relationship is primarily an often inverse market correlation. This is driven by factors such as:

• Gold being priced in dollars.
• Interest rate policies (which affect the attractiveness of dollar-denominated assets vs. non-yielding gold).
• Gold's role as a safe haven asset during economic uncertainty and inflation.
• The relative strength or weakness of the US dollar in the global market.

​
They are essentially two different types of assets (a commodity/store of value vs. a fiat currency/medium of exchange and reserve asset) whose relative attractiveness fluctuates based on the prevailing economic and market conditions.

---