There is an
intrinsic co-relation between gold prices and the US dollar. When the demand
for the US dollar falls, banks investors around the world invest more in gold.
Gold is considered to be a hedge against inflation,
recession, and other times of uncertainties, especially due to its high demand
and finite supply. This precious metal was, for a long time in history, used as
currency, and is still a safe haven for investors. Consequently, most central
banks around the world invest more in gold to preserve their assets during
volatile economic conditions.
On the other hand, the US dollar is widely accepted as an
instrument of global currency exchange. Hence, most central banks also invest
their funds in the US dollar.
When USD appreciates, an increasing numbers of investors
shift their investment from gold to Dollar. This fall in demand causes the
value of gold to depreciate. This behavior of investors creates an inverse
relationship between gold and the US dollar.
During the 19 century, The US dollar became a true fiat
currency, traded on foreign markets and used as a reserve currency without
risking the US gold reserves, while the price of gold was freed from the
restraints that had been imposed on it by financial policies designed to keep
currencies under control. Now US dollar was free from gold standard and now it
can fluctuate more widely.
The value of the gold remains stable in comparison to
currencies, but its price in any given currency can fluctuate as the perceived
value of that currency changes.
Downward trend in gold price in USD reflect confidence the
currency. Thus, the price of gold tends to move in opposite directions to the
value of the US dollar.
In the year 2014, gold had a steady start and the prices
rose through much of the year, fueled by geopolitical tensions. However, of
late, prices have fallen due to a stronger dollar.
In early 2014, gold started at $1202 per ounce and showing
upward trend and in March gold was on its 6 months high $1379 per ounce, due to
global worries, it left investors in a situation to think bullion as a safe
vault. However, the bubble soon burst as gold prices fell below $1,300 per
ounce at March end, on stronger-than-expected U.S. economic data.
Gold prices remained on either side of $1,300 before
plunging to $1,244 per ounce in the first week of June on positive U.S.
economic indicators and lower demand in China as well as India in contrast to
the record levels last year. During July mounting tensions over Ukraine and
Gaza sent gold prices to a 3 month high of $1,339 and sustained its upward
trend through July and August.
Since July, the U.S. Dollar Index (USD) – a measure of U.S.
currency against a weighted basket of its peers – has gained roughly 9%. That's
a stunning move for a major currency over a span of just four months. The USD
Index just peaked at 87.60 – the highest since 2010.
In September, prices remained steadfastly under the $1300
range, eventually dipping to a 2014 low of $1,215 in September on the back of a
strong dollar. News of U.S.-led air strikes in Syria lifted gold price from
these levels. As the dollar rose to four-year highs, gold prices fell to a
nine-month low of $1,207 per ounce in September end.
During September gold bounce back from nine month low to $1222
per ounce this was the time when global equity market fell.
Gold prices are likely to drop further as USD continuous to strengthen.
Additional, persistent economic recovery may prompt the Federal Reserve to
raise interest rates sooner than expected. The waning of geopolitical tensions
will also weigh on gold prices. However, advent of the festive and wedding
season in India is expected to spruce up demand in one of the biggest markets
for gold.
Oil prices posted their sharpest losses since 2011. Spot
gold was down 0.6 per cent at $1,184.44 an ounce at 1033 GMT, while US gold
futures for December delivery were down $13.10 an ounce at $1,183.50. "Weakness
in oil prices isn't good for gold, because inflation expectations are adjusted
downwards," ABN Amro analyst Georgette Boele said.
The OPEC decision also hurt stock markets and other
commodities, with copper falling to an 8-month low. Sliding oil prices are set
to remain in focus as US markets reopened after the Thanksgiving holiday.
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