Gold is commonly viewed as a hedge against inflation, an
alternative to the U.S. dollar, and as a store of value in times of
economic or political uncertainty. Over the long term, the
relationship is mostly inverse, with a weaker USD generally
accompanying a higher gold price, and a stronger USD coming
with a lower gold price. However, in the short run, each
market has its own dynamics and liquidity, which makes
short-term trading relationships generally tenuous.
Overall, the gold market is significantly smaller than the forex
market, so if we were gold traders, we’d sooner keep an eye
on what’s happening to the dollar, rather than the other way
around. With that noted, extreme movements in gold prices
tend to attract currency traders’ attention and usually influ-
ence the dollar in a mostly inverse fashion.
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