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How Are Gold Prices And The US Dollar Related?


The gold market is a very volatile market all over the world. The gold prices change every day. In different countries, the prices vary based on different parameters. The ups and downs of the US dollar in the international market is one of the major tools to determine gold prices.

How Are Gold Prices And The US Dollar Related?

Gold used to be a currency in the early ages which has been altered due to many economic reasons. Yet, gold holds great value for both the macro-economic perspectives and personal finance segments. Not only for a state's strong economy, even for personal investments gold puts strong value. Investors nowadays are focussing on gold immensely.

Multiple economic factors have impacted the gold segment both negatively and positively. Investors have to follow economic trends, major political events, and federal banks' decisions to have some perspective about the spot gold prices or gold futures. But how does the market price of gold differ with time to a large extent? How is gold related to the US dollar? To understand this topic, we must go back to history.

In 1944, the significant Bretton Woods Agreement was signed among 44 countries. Through this agreement, they decided that imports and exports or international trading will occur via the US dollar. At the end of a year, a country will sum up its total US dollar reserve. Then as the country goes to the International Monetary Fund (IMF) with that amount of US dollar, the country will be given gold that holds the value of the same amount of dollars. That means the currencies are convertible to gold.

Because of this agreement the USA eventually took profit from the fact that all other countries are obliged to trade against the US dollar. In addition to that, the value of gold depends on gold. Like gold, it is also applicable for other commodities. As discussed before, gold used to be a currency earlier, it lost its importance as currency. But now gold has become a powerful asset against the US dollar.


Gold is a precious metal and is also considered a hedge against inflation. It is a safe haven. Hence, every country is interested in keeping a good amount of gold in their reserve. Both gold and the US dollar used to be identified as good investments.

The US dollar is the reserve currency. But the volatility of the US dollar against other currencies has actually driven investors more towards gold. Historically it has been proven that the price of gold has always given good profit in the long term. The price of gold has always increased largely.

So, the value of gold and dollars act inversely. As the value of the US dollar rises the value of gold falls. Similarly, as the value of the dollar falls, the value of gold jumps higher. The strength of the US dollar is related to the factor of interest rates.

In the last year during the first or second wave of the pandemic, this inverse relation got very prominent in recent times. The sudden and huge fall of the US dollar moved investors to gold in big numbers. Thus the gold price went a record high.

Worldwide, not all countries are producers of gold. They have to buy gold from the international market for their state reserve or to meet the demand for jewelry.

When a country buys gold from the international market, it will have to trade it with the US dollar. Additionally, as the physical gold comes to the country it has to pay the mandatory custom duty. This also determines gold prices.

India is one of the biggest importers of gold, but we do not produce much gold. So, as the US dollar falls in the international market the price of gold rises. So it will be costly for India to buy gold at that point in time. But in a different situation when the dollar is rising and the gold price is falling it will be a better time for the state to buy gold from the international market.

Uncertain demand-supply, fear in the market can impact the gold market within a very short span of time. The US dollar and US Federal Reserve will play significant roles in that road.

Read more about: gold gold prices us dollar
Story first published: Tuesday, August 3, 2021, 15:26 [IST]
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