Gold up, dollar down? Not quite
May 24, 2018
Some people consider it conventional wisdom that when the value of the U.S. dollar is strong, the price of gold will be weak. Although it may seem like there is some sense to this, since both the dollar and gold have been the linchpin of the world’s financial systems for more than the past century, that correlation has not necessarily held true over either the short or the long terms.
For instance, in 1970 the U.S. Dollar Index was about 120 and the price of gold was around $40. As of May 22, 2018, the Dollar Index was about 93.5, down about 22 percent from 1970, while the price of gold was a bit less than $1,300, up roughly 3,150 percent. But keep in mind that this is not necessarily a fair comparison, as the price of gold in 1970 was controlled and suppressed by the U.S. government and allied European central banks.
For shorter time periods, review how the U.S. Dollar Index and the price of gold has performed over the previous 10 calendar years to see if there is a negative correlation:
Year US Dollar Index Gold Price Change
2017 – 9.8% + 13.6%
2016 + 3.7% + 8.5%
2015 + 9.5% – 11.1%
2014 + 12.4% – 0.8%
2013 + 1.2% – 28.2%
2012 – 1.4% + 7.0%
2011 + 1.6% + 10.2%
2010 + 1.5% + 29.7%
2009 – 4.2% + 23.6%
2008 + 6.0% + 6.1%
As you can see from this small sample, the U.S. Dollar Index and the price of gold both rose in four of the calendar years (2008, 2010, 2011 and 2016). There were only two years where the inverse changes were anywhere near the same percentages (2015 and 2017). On the basis of this analysis, it seems obvious that there is not an inverse correlation between the value of the U.S. dollar and the price of gold.
The conclusion is that there are other worldwide political and economic factors besides each other that impact both the value of the U.S. dollar and the price of gold. Also, as I detailed in last week’s column, the recent strength in the U.S. Dollar Index has not necessarily resulted in the price of gold falling when its price is expressed in other significant world currencies.
Some followers of precious metals are concerned that the combination of a rising U.S. dollar and also higher interest rates (which increase the opportunity cost of holding physical precious metals instead of an interest-bearing asset) will put continuing downward pressure on the price of gold for the immediate future.
While the modest decline in the price of gold since early April, as measured in U.S. dollars, is almost the exact inverse of the rise in the U.S. Dollar Index, the two are not correlated.
In the short term, the price of gold (and other precious metals) may decline, stabilize, or rise against the U.S. dollar. Still, any short term moves will not affect my long-term expectation that the prices of gold and silver will far outperform the value of the U.S. dollar. It is the long-term prospects for any assets that are far more important than any day-to-day fluctuations.
If you need an example of how the price of gold could increase, even if the U.S. dollar remains strong for several months, here you go. On about April 15, 2005, the U.S. Dollar Index was approximately 83.5 and the price of gold was $424.75. About Nov. 29, 2005, the U.S. Dollar Index had soared all the way to about 92, a 10 percent increase in 7-1/2 months. At the same time, though, the price of gold also soared, closing in U.S. markets on Nov. 29, 2005, at $499 – a 17.5 percent jump!