Gold and the US Dollar: From Rare Positive Correlation to Negative Correlation Reversion

According to the Zhitong Finance and Economics APP, as the US dollar has weakened in the past two months due to rising rate cut expectations, the price of gold priced in US dollars has risen (of course, this is not the only reason, as the price of gold priced in other currencies is also at historical highs).

Gold and the US dollar are almost always negatively correlated. However, when the financial markets are under pressure, this negative correlation pattern is often broken as investors flock to gold and the US dollar as safe-haven assets. For example, after the 2008 financial crisis, investors turned to both gold and the US dollar, causing both to rise simultaneously.

Surprisingly, for most of the time when the gold price has risen significantly this year, the US dollar has also been rising. In the first few months of this year before the US dollar started to decline last month, gold and the US dollar were in a positive correlation pattern.

This is very unusual. 2024 is not a year filled with pressure for the financial markets. Apart from the crazy days in early August, risk assets have been rising, and the US economy has shown resilience.

The simultaneous rise of gold and the US dollar seems to be caused by a series of factors. Gold has had its best year in history so far, with reasons including increased demand from Chinese investors, global central banks increasing gold reserves, US rate cut expectations, escalating geopolitical uncertainties, and speculative interest from hedge funds. The reason for the US dollar's strength is that US interest rates have been maintained at higher levels for longer than other countries.

Mark Farrington of the global forex consulting firm Farrington Consulting stated that there is a more short-term relationship between gold and the US dollar, making it difficult to trade based on correlation.

However, since July, gold and the US dollar seem to have returned to a negative correlation pattern. The US Dollar Index (DXY) has been continuously declining, while the price of gold has hit new highs several times. Data shows that the price of gold hit a historical high on Tuesday, closing at $2,550.6, marking the 30th time this year that it has refreshed historical highs Supporters of gold believe that the recent rise in gold prices indicates that it is an excellent tool for hedging against currency and fiscal mismanagement, as well as the resulting inflation risks. Michael Armbruster, Managing Partner at Altavest, stated, "The fundamentals of the gold bull market remain strong, and we believe it is a good time to go long or add to existing long positions on further pullbacks." He also pointed out, "Foreign central bank buying and gold-backed currencies in BRICS countries are very bullish fundamental factors."

Data from Wednesday showed that as of March this year, US job growth was weaker than initially estimated, while minutes from the Fed's July meeting indicated that several officials were leaning towards an immediate rate cut. Rania Gule, Senior Market Analyst at XS.com, stated, "This further strengthens expectations that the Fed will begin a monetary easing cycle in September, which will be positive for gold."