Gold Price and the US Dollar

By Joel Uqagmire

Many economists have struggled to map the correlation between the gold price and the stock market. The easy answer is that there is not any significant relationship that can be used for gain. The only partial trend is that when the U.S. stock market dives, and other world markets do not, the price of gold will go up, more often than not. So, economists must find a way to relate the price of gold to the U.S. market. The easy answer is simply to track the gold price against the U.S. dollar index. This historical index has been used for decades as a means of judging inflation and deflation within the economy.

The correlation coefficient between the spot gold price and the U.S. dollar is quite high, actually. Typically, a weaker dollar means a stronger gold price per ounce. In this case, the devaluation of the dollar can lead to significant gains in the price of gold. As of this article's publication date, the Dollar Index (DXY: 77.55) is trading at its lowest level of the year, and is down over 10% since mid-April. The gold price is having one of its strongest years and reached a two-month high on August 4th. These dates are insignificant; the point is that there is an inverse relationship between these two variables.

The greatest example of this case is during the Great Depression. While the price of gold was fixed by the government, gold stock prices were not. During the tumultuous years of the early 1930s, the share price of companies like Homestake Mining had gains of more than 400%. Interestingly, the fixed price of gold created a strong downward bias for the gold stock share price. Hence, chances are that the devaluation of the dollar would have lead to even sharper gains.

In short, an excellent tool for comparison with the gold price is the U.S. Dollar Index. The strong correlation and historical pattern allows for interesting assumptions to be satisfied.

Gold Price

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