The rise of gold in the face of the declining dollar

With the value of the dollar falling roughly 10% this year, gold has had a rapid rise to new highs. As international investors have started to wane in the confidence in the safety of American power, the fall in the value of the dollar has shown that. As investors have moved into gold, prices have hit $3,357. A roughly 30% increase on the year.

In times of economic uncertainty precious metal has historically been viewed as a popular alternative. It's been seen as a hedge against inflation because of its limited supply, protecting against currency devaluation or inflation. And unlike many other financial assets, gold is a physical asset allowing it to have more liquidity in times of economic uncertainty. As Central Banks hold roughly 20% of all gold in the world, their management policies have a very large impact on the price of gold. Golf is usually traded in dollars even on the international market, so it often reflects an inverse relationship to the price of a US dollar.  Recent comments by Jerome Powell that tariff policies will likely slow growth, has pushed more people into the popular alternative. According to SPI Asset Management gold is now “the most crowded trade on the planet”. As investors moved into gold to help hedge against inflation and fears of a recession it crossed $3,000 an ounce for the first time in March and has now hit $3,357. As the dollar has depreciated this year, gold has become less expensive for foreign buyers, another factor increasing demand and therefore its price. 

According to the US Dollar Index, the value of a dollar has fallen to a 3 year low. With a year to date decline of 8% and a 10% from year highs. A large portion of the loss came after President Trump announced his “Liberation Day” tariffs. This shows the economic impact that trade uncertainty has on the dollar, which indirectly impacts currencies around the world. 

The value of the dollar has a significant impact on the strength of US and international trade. According to the US Bureau of Labor, currency depreciation causes higher import prices. When currency depreciates you can buy less goods with 1 dollar, which is why it costs more to import goods. So the 10% decline in the dollar has resulted in a 10% increase in importing goods. This further compounds fears on the strength of the American economy, pushing people into alternative currencies like gold. However, a weaker currency makes it less expensive for other countries to buy American goods, potentially decreasing the trade deficit the United States faces with several countries. But the increase in exports may be offset by higher costs, so it is unknown how this will impact the trade deficit. 

With the uncertainty of tariffs and consumer confidence in the United States it is yet to see how the dollar will recover. For the dollar to recover, international investors need to have more confidence in the direction of the American economy, which can come directly from the resolution of the tariff situation and the easing of global trade tensions. The price of gold will be directly related to what the Central Banks do, once confidence in the economy recovers and fiscal policy loosens gold prices might see a decline to previous levels.