The value of the U.S. dollar against major foreign currencies always plays a role in determining the price of gold because the precious metal is priced in dollars around the globe. Recently, though, the dollar has proven to be particularly pivotal for gold.
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After soaring to a new all-time closing high of nearly $2,070 an ounce in early August, gold gave back $200 an ounce by late September. That decline closely correlates to a rebound in the value of the dollar, providing strong evidence of the tight inverse relationship between the dollar and gold.
During the one-month period ending on September 24, the U.S. Dollar Index—a measure of the dollar against a basket of major foreign currencies (ticker symbol DXY)—rose 2.4 percent. During the same period, gold lost 5.4 percent. The inverse correlation was even stronger during the five days ended on September 24, when the dollar rose nearly 1 percent and gold dropped 3.4 percent.
As the U.S. dollar rises in value, it becomes more expensive for foreigners to purchase gold, which can have a significant influence on demand for the precious metal since its largest markets lie outside of the United States.
Longer term, the dollar’s decline has helped drive gold up during 2020. Over the past three months, the dollar is down 3 percent while gold is up 6 percent, and during the previous six-month period, the dollar is down 7 percent, helping push gold up 15 percent.
Based on recent history, it seems clear that the near-term price of gold is heavily dependent upon the outlook for the U.S. dollar.
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