When you think about the gold market, it's impossible to separate the idea of gold's "spot price," its prevailing value "on the spot" at any given moment, with the value of the U.S. dollar.
While it perhaps makes more sense to measure the dollar's purchasing power in terms of a commodity like gold, the way the global financial system generally works is obviously the other way around. (We price things in dollars, as do most of the participants in the world economy.) The point is that the comparison or measurement can take place in either direction.
In some sense, the dollar and the gold price are often mirror images of one another. When the dollar is struggling, such as after the financial crisis, gold prices tend to rise. The inverse is also generally true: the stronger the dollar is, the less dollars it takes to purchase the same amount of gold, hence making the metal "less expensive."
After rallying for much of the past three years, the dollar has softened considerably in 2017. So far year-to-date, the USD is down as much as 7% against many of its major peers (as measured by the DXY index, for instance). This has as much to do with an improvement in emerging markets and Europe as it has to do with an stall in any pro-growth policy changes (in taxes, healthcare, or regulations) being implemented by the new U.S. administration that would give the Federal Reserve reason to continue raising interest rates.
However, a weaker dollar actually allows the Fed to make it seem as though inflation and wages are rising faster than they truly are. Really, this would just be the "inflationary" impact of a falling currency. Yet—of its own doing—the Fed is caught between a rock and a hard place: some pundits are even recommending that the Fed not reel in any of its stimulus programs yet due to the declining dollar. This may be precisely what has to happen for the time being to avoid crashing the financial system rather than continued policy normalization.
Among other anomalous market conditions like an endless string of record-highs for stock market indices, the typical negative (inverse) correlation between the dollar and broader commodity prices (not just precious metals) began to break down. The inverse relationship makes logical sense as described above with measuring the dollar in gold or vice versa. However, free-floating foreign exchange rates and the dollar's role as the world's de facto reserve currency have weakened the direct price sensitivity of commodities to the USD.
A Bloomberg View column by Shelley Goldberg offers a handful of reasons for this disruption or dislocation. She cites the walk-back of proposals to scrap NAFTA to more modest adjustments to the existing trade agreement; the fact that investors continue to pile into equities; as well as the many challenges the Trump administration has faced in enacting its agenda. (Goldberg also factors in the retreat of the U.S. from global climate change agreements, thereby abdicating its leadership role in the emerging "green economy," as a fourth cause. It's far too soon to judge the actual effects of such a shift on international commerce, however.)
What does this strange dollar behavior mean for gold? While it's true that the dollar and gold prices have at times moved in tandem over the last year or so, the inverse correlation remains a consistent driver of the yellow metal's fundamentals. Don't expect gold to underperform for very long in a weak-dollar environment.
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