How Does the US Dollar Affect the Price of Gold?

There is an intrinsic relationship between the strength of the US dollar and the spot price for an ounce of gold. The spot price for gold hit an all-time high quite recently, but it may not immediately be clear why.

This article is your guide to understanding the different factors that can change the price of gold, the strength of the dollar, and their interaction with each other.

The Inverse Relationship Between the USD and the Price of Gold

Simply put, the relationship between the US dollar and the price of gold is traditionally inverse. In other words, as the value of one increases, the value of the other decreases.

It is not a perfect relationship. There have been times that the two have varied directly – rising or falling together – or times where there hasn’t been much correlation.

However, the important thing to understand is that the relationship between these two is a correlation, not a causation. The strength or weakness of either element – the dollar or gold – does not cause the other. It’s more accurate to consider one a reflection of the other.

Historical Data and Key Events

Let’s observe how this relationship has played out over the past few years. It is interesting to look at different events and see what their effect was on the price of gold, either immediately or in the following months.

Factors Influencing the Value of the Dollar and Gold

Neither the US dollar nor gold exists in a vacuum. Both are affected by both internal and external factors. However, exactly which factors and their effects on one or both vary. So, let’s discuss all the different elements that can act upon these two commodities’ values.

Monetary Policy

First and foremost, the US monetary policy can influence both the dollar and the spot price for gold. The Federal Reserve manages both the money supply and interest rates in the country, and fluctuations in either can have profound effects on the value of the dollar.

More broadly, executive edicts or laws can restrict or hamper the availability of gold to the American people. FDR’s confiscatory EOs in the 1930s led to decades where gold ownership was severely limited and discouraged in this country.

These days, a similar FDR-style policy change seems less likely. The two main monetary policy factors on the value of a dollar are inflation and interest rates.

Inflation

Inflation is a measure of how diluted a currency is. If a country’s gross domestic product – its output – remains the same, but the supply of dollars in the country increases, then the value of each dollar in the system is reduced.

Recent times have witnessed inflation increases due to profligate spending by the federal government and a concurrent printing of new dollars to pay for these projects. As the Federal Reserve pumps out an increasing number of bills, each bill – both new and existing – is less valuable because the increase does not reflect increased productivity in the overall economy.

It is not possible, however, to inflate gold. So, as a general but reliable rule, the value of gold increases as the dollar inflates. The more dramatic the inflation rate becomes, the sharper the increase in the price for an ounce.

Interest Rates

The federal interest rate is the amount that banks charge one another for overnight loans. This rate, also known as the “prime” rate, is determined by the Federal Reserve.

Setting interest rates is a delicate balancing act, however, because of their broader impact on the American economy. Lower interest rates mean that more people are willing to borrow, but fewer are willing to borrow. Higher interest rates create the opposite scenario, so the trick is to set the rate at a level where both sides of the deal can agree.

Interest rates aren’t simply a domestic concern, however. Higher interest rates tend to strengthen the dollar because foreign investors want to take advantage of the higher returns on investment vehicles. Lower interest rates have the opposite effect, though the interest rate-dollar relationship is not a cause-and-effect situation.

Building on that correlation, we can therefore conclude that the value of gold is likely to increase with low interest rates and decrease with higher ones. However, there is no direct correlation, and changes to one or the other (interest rates or the value of gold) may not overlap.

Economic Conditions

The economic conditions in the US, on the other hand, affect the value of gold more profoundly than they affect the value of the dollar. Generally, inflation and a weakened dollar are not good economic signs, but the health of the economy produces a measurable effect on the value of gold.

The reason is that the economy’s health increases or decreases the demand for a financial safe haven. Gold, due to its tangibility and permanence as a store of value, is a common investment avenue for people looking to preserve the value of their net worth when the economy is bad.

Conversely, a strong economy might not generate as much rush for the shiny yellow metal because consumer confidence is higher. If people aren’t as concerned about the fiat currency in their pockets and bank accounts growing less valuable, they tend not to move as much money toward gold.

However, a pure economic collapse is bad for everything. Without an economy, no trading can occur, and both elements suffer.

Geopolitical Events

Neither the value of the dollar nor the value of gold exists in a domestic vacuum. Certain geopolitical events can have positive or negative effects on one or both.

We have already talked about one of those, where rising inflation rates can generate a stronger dollar due to international interest. However, on a more practical basis, the supply of gold can be impacted by what is happening around the world.

Wars, social upheaval, or contentious political elections in gold-producing countries can constrict the flow of gold out of those lands. In that case, gold becomes scarcer, and its value increases.

On the other hand, the discovery of a new source of gold, either in an existing producer or a new one, could flood the market with more of the metal than ever before. In that case, the price of gold is likely to decline, as the demand probably stays the same as the supply increases.

Central Bank Gold Purchases

In recent years, central banks in emerging economies have sought to buy gold in massive quantities. Their aims are largely the same as smaller investors, in that they are trying to store some of their wealth and protect themselves from inflation. More gold can also inspire trust from the citizenry due to gold’s recognition as a universal and historical store of value.

Because the quantities of gold purchased are so large, they can move the price of gold higher due to the decrease in gold reserves.

Recent Trends and Exceptions

As we mentioned above, the general trend is that the value of the US dollar and the value of gold vary inversely with one another. However, this relationship has not remained entirely true at times. Notably, the two have roughly moved in the same direction since 2010.

Gold, of course, has been rising explosively in value since 2000. It set a record high in 2024, and the metal’s value has only weakened by a few dollars since.

Curiously, the Dollar Price Index has also shown a general uptick since 2010. The DXY, as it is called, measures the performance of the dollar against six other currencies, like the British pound, the Canadian dollar, and the Japanese yen.

However, the primary factor bolstering gold prices is likely inflation. During the same period, the dollar lost more than 31% of its purchasing power – leading many to seek out gold as a safe haven.

Before 2010, the relationship between the dollar and gold behaved more expectedly. Spikes in the strength of the dollar – for instance, in 1985 and 2000 – corresponded roughly with dips in the spot price of gold. Similarly, jagged dives in the DXY occurred nearly coincident with massive spikes in the gold price around 2011.

Global Effects of US Dollar Fluctuations

Since the end of World War II, the majority of international trading has been conducted with dollars. Furthermore, many countries use the US dollar as their reserve currency and stockpile stores of USD to trade with other countries.

Fluctuations in the value of the dollar can have far-reaching effects elsewhere. One of those effects is the price for gold in other countries.

As the dollar strengthens, it becomes more expensive for foreign investors to buy gold. Thus, a strong dollar is likely to weaken overseas demand for gold. Conversely, a weak dollar makes it easier to buy gold and causes demand to increase.

Conclusion

There is indeed a relationship between the value of gold and the value of the US dollar. It is an inverse relationship, where the gold price tends to rise as the dollar weakens, and vice versa.

However, the relationship is only a correlation. There have been several times where the two have moved together, or one has moved while the other has remained roughly constant.

There are a few factors to observe that may impact one or both elements independently, though. First, take a look at the state of the US economy, as a weak economy often precipitates a strong gold price and weak dollar.

Second, it’s important to study US monetary policy. Keep an eye on the inflation and interest rates managed and produced by the Federal Reserve.

Finally, understand that geopolitical events, like wars or political elections, can affect both the dollar and gold. If the supply of gold is suddenly constricted or American international trade decreases dramatically, there could be significant effects on the value of the shiny yellow metal and/or the US dollar.