New Delhi, India -- Invest in gold? If so, chances are you’ve seen you’ve been watching the prices of the precious metal avidly over the past month as price drop steeply from their dizzying January highs.
As is often the case, the culprit has been the US dollar, but how is the dollar affecting the price of gold? Why do gold and the dollar have such a close relationship, and what’s our gold price prediction for 2023 – will it continue dropping or is there light at the end of the tunnel? Read on to learn more and become an aureate expert.
What effect is the dollar having?
Gold has hit a 2-month low as strong economic data has emerged from the USA, dropping to . US consumer spending is on the up at a pace not experienced in two years, boosting inflation ever further. This comes on top of previous economic data that shows the US is weathering the global economic headwinds well.
The surprise data means that many investors think that the Federal Reserve will continue to increase interest rates, but much slower than before.
What is the relationship between gold and the dollar?
Gold and the dollar are often connected inversely – as gold rises, the dollar drops, and vice versa. The price of the pair is typically driven by the dollar though.
Since it is tied to the fortunes of the world’s most prominent economy and is used as a reserve currency across the world, the price of the dollar rises when the economic times are good, and drops in line with the US and global economy.
Gold, on the other hand, is seen as a safe haven, particularly against inflation. It’s also denominated in USD, so when the dollar rises against other currencies, the gold price rises, then drops in line with demand. When the dollar falls, gold drops, then rises as it’s bought in other currencies.
There is only being a limited supply of gold too – only 187,000 tonnes has been mined throughout history according to the US Geological Survey – and the relationship plays out similarly whenever there are economic troubles. You can see this in the price of gold – it rose precipitously during the early noughties recession, Great Recession, and in the wake of the Covid-19 pandemic.
Is the gold price likely to remain volatile?
So, will we continue to see the price of gold slide? Chances are, we will. Inflation in the US has been dropping back from historic highs over the past six months and is likely to continue this trend, so we’ll probably see gold dropping in lockstep. That said, we’re not out of the inflationary woods yet, so there may still be some surprises to come when it comes to the price of gold.
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