By James Trescothick, Chief Trading Educator at Stratton Markets
Gold and the USD could seem to the untrained eye, to never get along. However, both have something very fascinating in common - they're members of a special club - the safe haven clubs. Along with the JPY and CHF, Gold and the greenback are often the trader's choice in times of uncertainty.
Saying that, leaves no doubt whatsoever that there is an inverse relationship between the USD and Gold, with the market equation often as follows.
High USD = Lower Gold prices
Lower USD = Higher Gold prices
Trading the market is never that easy - of
course - because it's possible for both, Gold and USD to increase in value,
simultaneously. Often due to a crisis in some other country. That is why both
are members of the before mentioned safe haven club. But we're here to discuss
a little more about their relationship and history.
Gold and USD saga
Now, we can go back to their very first date - so to speak - which we can say was the "Bretton Woods Agreement", of 1944. This agreement was a landmark system for monetary and exchange rates. It was constructed at the United Nations Monetary and Financial Conference, held at Bretton Woods.
Under the agreement, currencies were pegged to the price of Gold, so the U.S. dollar was the worlds reserve currency, linked to the price of Gold. This so-called sweet relationship, lasted until 1971, when a nasty break up occurred due to concerns over the USD being overvalued.
For this reason, President Richard Nixon called for a temporary suspension of the dollar's convertibility, which meant that the Gold price became vulnerable to USD's external value. Pretty much ending their closely linked near 30-year relationship.
Since then, they have both tried to go their separate ways, but it really doesn't stop the market forever talking about them. In fact, in 2008, the International Monetary Fund (IMF) estimated that 40-50% of the moves in Gold prices since 2002 ware related to the USD.
The yellow metal in front of the adversity of interest rates
Therefore, though there are many elements to consider with the price of Gold, there is still a psychological tilt towards the yellow metal when of the value of the Scoular decreases. In fact, just look at the financial crisis starting from 2008 where the USD initially crashed against other currencies, such as the EUR and the GBP. At that time the US Government was forced to act, by reducing interest rates and introducing several rounds of quantitative easing.
And what was happening to Gold? Well, it hit an all-time high in August 2011. Since that time the USD has indeed struck back, and Gold's glorious run has stalled. But bear in mind that we have now seen eight interest rate rises in the US since the financial crisis.
While the verdict for many is still about where Gold will go next., One thing for sure though, this relationship seems destined to be at odds for a very long time.
*Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money
