How does the US dollar affect gold prices?


Ramallah – Dunya Al WatanPrecious metals prices faced strong pressure during the month of September, as the US dollar reached a one-year high and higher US long-dated bond yields led to gold selling.

Gold losses have confused the market in recent months, especially with high inflation rates that are usually supportive for investors who increase their investments in the precious metal. Despite this, the expectations of the leaders of major central banks indicate that the current rise in inflation is temporary, and that the sustainability of the economic recovery from the (Covid-19) pandemic will allow them to start tightening monetary policy before 2022, and this is among the main drivers behind the decline gold price.

Gold falls as the dollar hits a one-year high:

witnessed gold trading prices Declining to its lowest level since last March to reach $1,722.90 an ounce on September 29, a loss of about 9% from $1,895.10 an ounce recorded at the end of 2020, accelerating the decline in the price of gold due to the strength of the US dollar during this year, which prompted investors to Pursue higher returns on their money by holding dollars instead of metal.

On the same day (September 29), the US dollar index, which measures the dollar against a basket of currencies, rose above 94 points for the first time since October 2020, this rise comes as a reaction to the market’s recent signals from the US Federal Reserve that it is He will likely start tapering off his $120 billion in monthly debt purchases, as well as raising interest rates earlier than expected in 2022.

The US dollar’s support in the last few months has declined Purchasing Manufacturers Index Chinese manufacturing activity during the month of September fell to less than 50 points at 49.6 points from the August reading of 50.1 points, marking the first decline since the beginning of the epidemic, as factory activity was affected by restrictions on electricity supplies and pollution control measures, as well as concerns On the impact of the debt crisis at Chinese real estate giant Evergrande on the broader economy.

On September 3, gold traded at a two-month high above $1,833 an ounce, after rising from a low of $1,726.50 on August 9, then gold took a downward trend during September when the S&P 500 index in the US The United States is at an all-time high.

In early June, gold rose above $1,900 for the first time since January, raising expectations that the price might return to the psychologically important $2,000 an ounce level, but after falling through key support levels, gold was unable to make a new high.

Gold against the US dollar:

Governments keep treasures of this yellow metal to support their paper money, gold is usually denominated in US dollars and thus there is a relationship between the price of gold and the dollar as there can be an impact on gold prices as the value of the dollar goes up and down.

While the relationship between the value of the US dollar and gold is important, the dollar is not the only factor that affects the price of the precious metal. Other factors that affect the value of both gold and the dollar are interest rates, inflation, monetary policy, and supply and demand.

Gold and dollar prices can often appear to conflict due to investor sentiment and economic factors, but there is no definitive or formal relationship between the two.

Gold is an asset that has an intrinsic value, however, this value can fluctuate over time and sometimes in a volatile manner, as a rule, when the dollar increases in value compared to other currencies around the world the price of gold tends to fall in terms of the US dollar.

Gold does not give interest per se, therefore, it must compete with interest bearing assets for demand, meaning that other assets will require more demand due to the interest rate component, while the price of gold in US dollars is a widely accepted standard, 95% of the world must translate the value of the metal into their local exchange rates.

There is a psychological factor associated with the value of gold, the price of which is often sensitive to the overall perceived value of fiat or paper currencies in general.

What keeps pressure on gold prices?

Booming Stock Markets:

Global stock markets were bullish, supported by liquidity and increased retail participation, as accommodative monetary policy measures and the stance taken by the world’s major central banks to support growth amid the coronavirus pandemic, along with unattractive interest rates offered on fixed income instruments, improved appetite. The risk to the investors.

A brighter economic outlook:

According to the International Monetary Fund’s Economic Outlook report International Monetary Fund (IMF) in July 2021, the global economy is expected to grow by 6% in 2021 and by 4.9% in 2022, and emerging markets are likely to perform better than developed markets.

With major economies in developed countries like the US and UK expected to show a strong recovery after the pandemic, the growth outlook for the global economy remains strong, so gold is likely to look pallid at times like these, encouraging economic growth and gold don’t go hand in hand.

In the US, President Biden’s infrastructure bill is currently awaiting Senate approval. If the infrastructure plan is approved, it will likely create an average of two million well-paying jobs each year over the next decade, and is also expected to The proposed infrastructure investment of US$1 trillion by the US government, along with strengthening the labor market and getting rid of debt.

US dollar strength:

US 10-year Treasury yields rose steadily in 2021, rising from 0.90%-0.95% at the end of 2020 to 1.6%-1.65% in April 2021 and then stabilizing in the range of 1.2%-1.25%.

The US Dollar Index also managed to stay above the crucial level of 90 points, despite global inflationary pressures, indicating the dollar’s strength against a basket of some of the world’s most prominent currencies.

Weak demand for investment in gold:

Net inflows into gold market-traded funds have remained negative YTD ($-6797.2 million), although it turned positive in the second quarter to $2546.6 million, thus, the trend is that investors are not convinced to invest in gold In 2021 so far.

The factors that will decide the future path of gold are:

Inflation and interest rates:

In June 2021, retail inflation in the United States reached a 13-year high of 5.4%, and core inflation excluding food and energy prices jumped for the same month by 4.5%, the largest increase since September 1991.

With progress in vaccination and strong policy support, indicators of economic activity and employment continued to strengthen, sectors hardest hit by the epidemic improved but did not fully recover, and inflation rose, largely reflecting transitional factors.

Conditions remain favorable in part, reflecting policy measures to support the economy and the flow of credit to US households and businesses, the trajectory of the economy continues to depend on the path of the virus, and progress in vaccinations is likely to continue to limit the effects of the public health crisis on the economy, but risks to the economic outlook remain List, which could make the Federal Reserve to reconsider its policy stance, including its bond-buying program, if inflation slips and the economy continues to expand.


Please enter your comment!
Please enter your name here