Gold vs. the dollar: why one rises as the other falls
For centuries, gold has captivated humanity as the ultimate store of value, while the US dollar has reigned as the world’s premier reserve currency. In the financial markets, these two titans often move in a fascinating inverse relationship—when one strengthens, the other tends to weaken. This isn’t a mere coincidence but the result of deep economic forces at play. Let’s examine why this occurs and what it implies for investors.
The gold and the dollar relationship: a historical and economic perspective
1. Gold as a currency alternative
Gold is often called the “anti-dollar” because it serves as an alternative currency when confidence in paper money wanes. When investors worry about the dollar’s purchasing power, they flock to gold, driving up its price. Conversely, when the dollar is strong, gold’s appeal as an alternative diminishes.
Example: During the 2008 financial crisis, the Federal Reserve slashed interest rates and launched quantitative easing. Fears of dollar debasement and inflation sent gold from $700/oz in 2008 to over $1,900/oz by 2011, while the Dollar Index weakened considerably.
2. Interest rates and opportunity cost
The dollar is heavily influenced by US interest rate policy. Higher interest rates make dollar-denominated assets more attractive to global investors, strengthening the currency. Since gold pays no interest or dividends, its opportunity cost increases when rates rise, making it less appealing.
Example: From 2015-2018, the Fed raised rates nine times. The dollar strengthened by approximately 10% against a basket of currencies, while gold prices stagnated and even declined during periods of aggressive rate hikes.
3. Safe-haven dynamics
Both assets are considered safe havens, but they respond differently to crises. The dollar benefits from its status as the world’s primary settlement currency and its unparalleled liquidity. Gold benefits from being a physical asset outside the financial system.
Example: In March 2020, during the COVID-19 market panic, both initially sold off as investors sought cash. But gold quickly recovered as massive stimulus was announced, while the dollar eventually weakened on concerns about debt expansion.
4. Inflation and purchasing power
Gold is historically seen as an inflation hedge because its supply grows slowly (about 1-2% annually). The dollar’s value, however, erodes with inflation. When inflation expectations rise, gold typically outperforms.
Example: In 2022, with inflation hitting 40-year highs, gold initially struggled against a strong dollar driven by rate hikes. But by late 2022, as inflation proved persistent, gold began climbing despite dollar strength—showing the complex interplay of these forces.
5. Global trade and reserves
Central banks hold both dollars and gold in their reserves. When they diversify away from dollars, they often buy gold. This institutional demand can push the prices in opposite directions.
Example: From 2018-2023, central banks purchased record amounts of gold while some reduced dollar holdings, particularly Russia and China, amid geopolitical tensions and dedollarization concerns.
Trading the relationship
Understanding this inverse correlation helps traders:
➡ Hedging Forex trading: how to trade in falling markets
- Hedge portfolios against currency risk
- Speculate on macroeconomic trends
- Diversify across asset classes with different drivers
The correlation isn’t perfect—sometimes both rise together during global uncertainty—but the inverse relationship holds approximately 70-80% of the time over long periods.
Broker reviews for trading gold and forex
Here are 5 broker reviews for trading gold and forex:
XM Group
- Rating: 99/100
- Min. deposit: $5
- Platforms: MT4, MT5, Web Trader
- Gold/USD spread: Typically 0.6-2.0 pips
- Leverage: Up to 1:1000
- Regulation: CySEC, ASIC, FCA, IFSC
- Review: XM stands out for exceptional accessibility with its tiny $5 minimum deposit and extensive educational resources. Their customer service is available in 30+ languages, making them truly global. While spreads aren’t the absolute lowest, the combination of regulation, platform choice, and user-friendly approach makes them excellent for beginners interested in trading the gold-dollar relationship.
eToro
- Rating: 98/100
- Min. deposit: $50
- Platforms: Own Platform, MT4, MT5
- Gold/USD spread: Variable, typically 0.5-5.0 pips
- Leverage: Up to 1:30 (lower due to regulation)
- Regulation: FCA, CySEC, ASIC
- Review: eToro revolutionized social trading with its copy-trading features. For understanding gold-dollar dynamics, you can follow and copy experienced traders’ strategies. Their platform is intuitive for beginners, though advanced traders might prefer MT4/5.
Risk disclaimer: eToro is a multi-asset platform which offers both investing in stocks and cryptoassets, as well as trading CFDs.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 61% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.
This communication is intended for information and educational purposes only and should not be considered investment advice or investment recommendation. Past performance is not an indication of future results.
Copy Trading does not amount to investment advice. The value of your investments may go up or down. Your capital is at risk.
Don’t invest unless you’re prepared to lose all the money you invest. This is a high-risk investment and you should not expect to be protected if something goes wrong. Take 2 mins to learn more.
eToro USA LLC does not offer CFDs and makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication, which has been prepared by our partner utilizing publicly available non-entity specific information about eToro.
AvaTrade
- Rating: 98/100
- Min. deposit: $50
- Platforms: MT4, MT5, Web Platform, ZuluTrade
- Gold/USD spread: From 0.1 pips
- Leverage: Up to 1:400
- Regulation: Central Bank of Ireland, ASIC, FSA Japan, FSCA
- Review: AvaTrade offers exceptional regulatory security across multiple jurisdictions—ideal for cautious traders. Their spreads on gold are competitive, and they provide unique tools like AvaProtect (risk management insurance). The availability of automated trading through ZuluTrade and DupliTrade makes them suitable for those who want to implement algorithmic strategies on the gold-dollar correlation.
Exness
- Rating: 96/100
- Min. deposit: $10
- Platforms: MT4, MT5, Web Platform
- Gold/USD spread: From 0.3 pips
- Leverage: Up to 1:Unlimited (professional clients)
- Regulation: FCA, CySEC, FSC Mauritius
- Review: Exness offers arguably the most flexible leverage conditions and remarkably tight spreads. Their unique unlimited leverage for certain clients (with appropriate risk warnings) attracts experienced traders looking to maximize opportunities in the gold-forex relationship. The low minimum deposit and instant withdrawals add to their appeal, though beginners should approach with caution given the high-risk potential.
Pepperstone
- Rating: 95/100
- Min. deposit: $0 (not specified)
- Platforms: MT4, MT5, cTrader, Web Platform
- Gold/USD spread: From 0 pips (commission-based)
- Leverage: Up to 1:30 (retail), 1:500 (professional)
- Regulation: FCA, ASIC, CySEC, DFSA
- Review: Pepperstone is a favorite among serious technical traders. Their Razor account offers raw spreads from 0 pips plus commission, making cost predictable for frequent traders of gold and dollar pairs. The choice of cTrader alongside MetaTrader platforms caters to algorithmic traders. Their research and analysis tools are top-tier, helping traders understand and capitalize on the fundamental drivers behind gold-dollar movements.
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