World gold prices are denominated or valued in USD, so gold transactions that occur in an international context are carried out in USD. With this high usage, coupled with the demand for gold from countries outside the United States, the value of the USD will be quite crucial in influencing the price of gold.
The first reason is that when the value of the USD appreciates, the currencies of other countries will be the first to be affected, so that they experience a weakening against the value of the USD. With the weakening of other countries' currencies against the USD, while gold is denominated in USD, the cost of buying gold which is denominated in USD becomes relatively more expensive and the demand for gold tends to be depressed. Conversely, when the USD weakens, the costs incurred to purchase gold will be less, so the demand for gold can increase.
The second reason is because the gold price is denominated directly against the USD, so any weakening or general movement in the USD will make the gold price immediately show the opposite movement to the USD price change.
Another reason is that gold and USD are both considered safe-haven assets. However, gold as a safe-haven asset is relatively more popular than the USD, so if there is a change in the market risk appetite sentiment, the gold price will relatively change and directly have an inverse impact on the USD movement.
The common thread that can be drawn is USD, where USD affects the price of gold, while USD also affects other currencies. USD is considered a global currency, so the majority of global financial assets, even currencies including gold are valued against USD.
Thus, it can be concluded that when the USD moves is influenced by an issue or sentiment, it will also affect the currency and gold, for example when the US plans to provide stimulus, the sentiment that is absorbed is the weakening of the USD, so that it will have an impact on prices. Gold strengthened against the USD, while other currencies also strengthened (without any additional external sentiment) against the USD. With the condition of the USD, it seems that when the price of gold strengthens, other currencies also strengthen, but if we look more closely, the real effect comes from the movement of the USD value which is the underlying causes of the correlation.
By: Nikolas Prasetia
Get more information about gold and other commodities at The Source 22: ICDX 1st Quarter Update