In recent months, the inverse relationship between Gold and the USA remains "extremely strong", despite Bessemer attempting to assure that the USA is not seeking a weak dollar, Analysts point out that Trump's trade vision leans more towards a "weak dollar".
The relationship between Gold and the USD is complex—however, if Trump's obvious desire to weaken the USD is realized, it is likely to become a "strong tailwind" for this Precious Metal.
Tom Bruce, a macro investment strategist at Tanglewood Total Wealth Management, stated, "There seems to be an increasing preference within the Trump administration for a weak USD to enhance the competitiveness of American manufacturing. If this policy direction continues, it could be a strong tailwind for Gold."
During Wednesday's trading session, the USD showed some signs of weakness, following a Bloomberg report that the US and South Korea governments discussed monetary policy during a meeting in Milan on May 5. The report cited an insider, providing new clues suggesting that the Trump administration hopes to see a weaker USD.
However, Treasury Secretary Mnuchin attempted to reassure market participants that the USA is not seeking a weak USD. Bloomberg reported Wednesday that US trade negotiators are not committed to include currency commitments in potential trade agreements.
Nevertheless, Kit Juckes, a Forex strategist at Industrial Bank, stated in a report on Wednesday that Trump's policy moves are having a disruptive effect on the Forex market.
Juckes said he is "confident that Trump, in his desire to reshape the Global trade framework, leans towards a cheaper USD."
Historically, there has mostly been an inverse relationship between Gold and the USD. This relationship has been particularly apparent recently, when Gold Futures reached a historical intraday high of $3,509.90 per ounce on April 22. Meanwhile, according to Dow Jones market data, the USD index only closed at 98.278 the day before, the lowest level since March 2022.
Global X Senior Investment Analyst Trevor Yates stated that the inverse relationship between Gold and the USD has remained 'very strong' in recent months, with the weakness of the USD driving a significant rise in Gold prices.
However, Yates noted that the peculiarity of recent months is that, despite the rise in uncertainty and volatility, the USD has weakened, while during this period, Gold has acted as 'a more effective portfolio diversification tool.'
The simplest explanation is that a stronger USD makes Gold, which is priced in USD, more expensive for overseas buyers, and vice versa. Therefore, when the USD strengthens, Gold prices tend to decline, while a weaker USD helps support Gold prices.
Bruce indicated that a more subtle but important driver of Gold is interest rates. When yields on US Treasuries rise relative to yields in other countries or currency zones, the USD typically benefits, while Gold tends to weaken, not only because of a stronger USD but also because it 'behaves like a zero-yielding asset.' As rates rise, Gold becomes 'relatively less attractive' compared to interest-bearing alternatives.
However, Bruce mentioned that this dynamic began to change after the outbreak of the Russia-Ukraine conflict in 2022 and the 'subsequent freezing of Russia's Forex reserves by Western countries.' He stated that this prompted multiple countries to reduce their dependence on USD reserves and increase their Gold holdings.
He said that Gold 'is being used as a geopolitical hedge, not just a currency hedge,' which complicates its traditional relationship with the USD.
David Aspell, Co-Chief Investment Officer at Mount Lucas Management, commented in an email that in recent years, foreign central banks have moved away from the USD to accumulate Gold, leading to a significant rise in Gold prices. He stated that part of the reason for this accumulation by foreign central banks is to shift reserve assets closer to home and away from financial assets that fall within the scope of US government sanctions, as sanctions are being used more aggressively as part of US foreign policy.
However, according to George Milling-Stanley, Chief Gold Strategist at State Street Global Advisors, the relationship between Gold and the USD may have already weakened as early as during the 2008 global financial crisis.
He said that since then, there hasn't been a strong relationship between the two when the USD rises, but whenever the USD falls, Gold tends to outperform Large Cap, which he referred to as an 'asymmetrical relationship.'
Merrill Stanley said: 'All else being equal, a weaker USD increases the appeal of investing in Gold.'
Bruce from Tanglewood Total Wealth expressed that he still holds a Call on Gold, but noted that the relationship between Gold and the USD has become 'subtle'—or complicated by definition.
He said: 'Recent market dynamics have introduced some complexities.' He pointed out the trade of 'selling off USA Assets', where investors simultaneously sell USA Stocks, Bonds, and USD, which has disrupted some typical correlations, including those where Gold traditionally has an inverse relationship with the USD.
Bruce stated: 'If the USD begins to lose its safe-haven status, the historical inverse relationship between Gold and the USD may further weaken or completely evolve.'
