Does gold need the US dollar to fall?
21 September 2022
Dear Investor,
One of the interesting myths regarding gold as an investment is one that suggests it only does well in periods the US dollar (USD) is falling. Indeed, some analysts go so far as to say that it’s the “anti-dollar”.
It’s of course worth noting briefly that up until 1971, US dollars were formally “backed by gold”, at a formal price of close to $35 per troy ounce (oz), meaning you could exchange USD $35 for an ounce of gold through the banking system.
This backing was brought to an end during the Nixon administration, and it has now been just over 50 years since the US abandoned the gold standard.
Back to the myth regarding gold and its relationship with the USD, in simple terms, some believe that anytime the USD is going up in value, the gold price will be going down, and vice versa.
A detailed examination of market history tells us the relationship is more complicated.
Yearly changes in inflation rates would go onto bottom barely 12 months after this magazine cover was published, with rates climbing ever since.
What does the data tell us?
The chart below looks at the USD gold price, and movements in the USD index, or DXY, which measures changes in the value of the USD versus other currencies like the Euro, Yen, and British Pound Sterling.
Chart: USD gold price and DXY 2017 to 2022
Source: London Bullion Market Association, Yahoo Finance
Over the past four and a half years, the USD gold price is up by 40%. The USD, asmeasured by DXY, has also risen over this period, increasing by 14%.
While gold might prefer a falling USD, it can clearly go up alongside the USD.
Longer-term analysis also shows the relationship between the two assets is not as simple as some might think.
This can be seen in the table below, which analyses more than 50 years of monthly market data for the USD Index, and for the USD gold price, from the end of 1971 to end June 2022.
US dollar gold price and US dollar movements 1971 to 2022
Source: LBMA, ABC Bullion, Marketwatch
The data tells us
The dollar is slightly more likely to fall as it is to rise in any given month (295 rising months vs 310 falling months)
The average move in the dollar is similar to the upside (+1.88% in rising months) and downside (-1.82% in falling months)
While gold typically falls when the US dollar rises, it rises alongside the dollar approximately 40% of the time.
While gold typically rises when the USD falls, it’s fallen in just over 30% of the months the USD has fallen.
Gold’s average monthly return in months the USD rises (-0.77%) is one third of its average monthly gain when the USD falls (+2.31%)
Given this data, while there is a degree of truth to the idea that a rising USD environment is generally bad for the USD gold price (and vice versa), the relationship is not that simple.
Gold can perform well even when the USD is rising, while gold can also experience periods of weakness in environments the USD itself is falling.
Relevance for Australian investors
The impact of the USD as it relates to gold price performance is even more nuanced when it comes to Australian investors. This is because the Australian dollar (AUD) gold price is also influenced by movements in the AUDUSD exchange rate.
In environments where the USD is rising, the AUD gold price may go up, even if the USD gold price has fallen. The table below highlights this, recreating the table above, but using AUD instead of USD gold price movements.
Australian dollar gold price and US dollar movements 1971 to 2022
Source: LBMA, ABC Bullion, Marketwatch
The data tells us
Gold priced in AUD increased in 47% of months the USD rose
Gold priced in AUD fell in 42% of the months the USD fell
The average return for gold priced in Australian dollars is positive irrespective of what the USD is doing (+0.42% in months the USD is increasing, and +1.32% in months USD is falling)
Given these findings, while a view as to the direction of the USD is one variable investors may wish to consider when deciding on a gold allocation, it’s far from the only one.
Warm regards,