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Fri12152017

Last updateSat, 29 Jul 2017 12am

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Gold and US Dollar move in tandem

The conventional wisdom is that gold and the dollar should move against each other. The classic explanation for gold's tendency to move opposite to the dollar is that gold is denominated in U.S. dollars. When the greenback becomes less valuable, one ounce of gold will cost more paper dollars.

Since the dollar was freed to float against other currencies in 1971, the statistical correlation between gold and the dollar stands at around negative 27%, according to CPM's research. That means over the past 38 years, if an investor bet that gold would trade against the dollar, he was only right 27% of the time.

However, as shown in the chart below, gold price has been moving in tandem with US dollar notably the second half of last year.

US_and_Gold_links

This is not the first time gold has defied conventional wisdom. In late 2008, after the collapse of Lehman Brothers, many analysts and investors expected gold prices to surge as they saw gold's value as a safe-haven strengthening. Instead of rising, however, gold prices plummeted from above $900 an ounce in October to below $700 in just a month. Institutional selling was later cited for the speedy drop.

Safe-haven buying is probably the main reason for gold and the dollar to move in lockstep because

  1. Gold is seen as a hard currency. When inflation or economic troubles endanger the value of paper money, it becomes more valuable.

  2. The U.S. economy is relatively better than most others and the dollar is the most liquid currency in the world. In times of crisis, liquidity trumps everything else.