What is the relationship between the dollar and gold?

Federal Reserve

The relationship between us dollar and gold

Although the dollar is not as stable as gold, it is much more liquid than gold. As a result, the dollar is considered the first category of money and gold is the second category. When the international political situation is tense and uncertain, people will buy gold in anticipation of a rise in the price of gold, but more people will keep their currency in their hands. If countries need to buy weapons or other supplies from other countries in times of war, they will also empty their gold in exchange for dollars. Therefore, in a period of political instability, gold may not rise, but also depends on the trend of the US dollar. In short, if the dollar is strong, gold will be weak, and if gold is strong, the dollar will be weak.

Usually, when investors save their capital, they will give up the US dollar when they take gold, and they will give up gold when they take us dollars. Although gold itself is not legal tender, it always has its value and will not depreciate into scrap iron. If the trend of the US dollar is strong and there is a great opportunity for the appreciation of the investment dollar, people will naturally chase the dollar. On the contrary, the weaker the dollar moves in the foreign exchange market, the stronger the gold price will be.

Since the 1980s and 1990s, the U.S. economy has developed rapidly, and a large number of overseas funds have flowed into the United States. During this period, because the rate of return on investment in other markets is far greater than that of gold investment, investors withdraw from the gold market on a large scale, resulting in the fall of gold price for 20 consecutive years. In 2001, the global economy fell into recession. The United States lowered the federal funds rate 11 times in a row, which led to the rapid decline of the US dollar against other major currencies. In order to avoid inflation and currency depreciation, investors began to return to the gold market, making the trend of gold show a key turning point. Since 2002, although the U.S. economy has gradually stepped out of the haze of recession, it still faces many challenges due to the negative impact of the Iraq war. In 2003, foreign investors began to pay close attention to the double deficit problem in the United States. Although the Federal Reserve tried to reduce the trade deficit by devaluing the currency, this method did not seem to work. The attraction of the US dollar to overseas investors was becoming smaller and smaller. A large amount of capital flowed out to Europe and other markets. The scale of gold investment also reached a record high. Since 2004, in order to curb inflation and attract overseas funds to offset the deficit gap, the Federal Reserve adjusted its loose monetary policy, trying to gradually raise interest rates to a neutral level, that is, 3.5% to 4%. However, in 2004, the trade deficit was still at a record high, and consumer confidence was further destroyed. At the same time, high oil prices deepened the market's worries about inflation, and gold took this opportunity At the end of 2004, it rose to a high of 456 US dollars / ounce. During this period (2001-2004), through the correlation analysis of the dollar index and the closing price of gold, the correlation coefficient is - 94.70%, which is highly negative correlation.

For a long time, the economy of the euro zone has been in a state of depression, which is obviously incompatible with a strong euro. In particular, in order to reduce its huge trade deficit, the United States adopted a policy of devaluing the US dollar, which raised the exchange rate of the euro and made the economic development of the euro area very passive. Since May 2005, the rapid decline of the euro against the US dollar not only shows that the euro is under the pressure of regional economic stagnation, but also suffers from the political crisis caused by the referendum of France and the Netherlands to veto the new constitution. Euro, the only currency that can compete with the US dollar in the fields of world trade, investment and foreign exchange reserves, has been in full swing for a time. However, market investors are worried about its stability and adjust their investment portfolio in time. As a result, a large part of funds will flow into the gold market with the function of hedging, especially in the demand for real gold. The negative correlation between gold price and US dollar is obviously loose, and the opposite correlation mode has been broken. Through the correlation analysis between the US dollar index and the closing price of gold from May 2005 to June 2005, the correlation coefficient is 44.8%, showing a positive correlation. The impact of US dollar on the gold market is mainly in two aspects: on the one hand, the US dollar is the marked currency in the international gold market, so it is negatively correlated with the gold price. Assuming that the value of gold itself has not changed and the US dollar has fallen, the price of gold will rise; on the other hand, gold is an alternative investment tool for us dollar assets. In fact, in the years before 2005, one of the main factors for the rising gold price was the sharp decline of the US dollar for three consecutive years.

From the historical statistics of the past 30 years, the correlation between us dollar and gold is about 80%, while from the data of recent 10 years, the correlation between us dollar and gold tends to - 1%. Therefore, it is important for us to analyze the change of the exchange rate of gold.

Generally, the tool for us to analyze the trend of the US dollar is the US dollar index, which is an indicator that comprehensively reflects the exchange rate situation of the US dollar in the international foreign exchange market, and is used to measure the change degree of the exchange rate of the US dollar against a basket of currencies. The US dollar index (USDX) is calculated by referring to the geometric average weighted value of the exchange rate changes of six currencies against the US dollar in March 1973, and its value is measured based on 100.00. The quotation of 105.50 means that its value has increased by 5.50% since March 1973.

March 1973 was chosen as the reference point because it was a historic turning point in the foreign exchange market. Since then, the major trading countries have allowed their currencies to float freely with the currencies of another country. The agreement, reached at Smithsonian college in Washington, symbolizes the triumph of free trade theorists. The Smithsonian agreement replaced the unsuccessful fixed exchange rate system reached in Bretton Woods, New Hampshire, about 25 years ago.

The current dollar index level reflects the average value of the dollar relative to the 1973 benchmark. So far, the dollar index has soared to 165 points, and has fallen below 80 points. This change characteristic is widely compared with futures stock index in quantity and rate of change.

The strength of the US dollar is measured by calculating the combined rate of change of the US dollar and a selected basket of currencies, thus indirectly reflecting the changes in the US export competitiveness and import costs. If the U.S. dollar index falls, it means that the U.S. dollar has depreciated against other major currencies. The calculation principle of US dollar index futures is to calculate the overall strength of the US dollar in a weighted way based on the trade settlement volume between the major countries in the world and the United States, with 100 as the dividing line. After the euro was launched on January 1, 1999, the subject matter of the futures contract was adjusted, from 10 countries to 6 countries. The euro also became the most important and heaviest currency, and its weight reached 57.6%. Therefore, the fluctuation of the euro has the greatest impact on the strength of the dollar index.

From the performance point of view, although the negative correlation between the dollar index and the gold price trend is not from the beginning to the end, but based on the fundamental attributes of commodities and currencies, the negative correlation between the two is the basis. Therefore, it is likely to be replaced by a strong fall in gold prices based on the possibility of a reverse correction.

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