A person who is conscious of the buying and selling of US$ gold price and the Dollar Index, would undeniably be aware of the fact that they are related in inverse proportion. The worth of money is in jeopardy of sinking steeply, and it is ever more likely that the world transitory system will have another hyperinflation, parallel to what occurred back in the 70`s, except for the fact that this time it is going to be even worse.
The basic reason for gold and dollar being in complete opposition is that gold is more of a currency. It is being traded in the global market as money, and because of this very reason, dollar happens to lose its value on the foreign exchange market over a prolonged duration. During the same period, gold price is expected to gain a rise. At this point, the fact cannot be overlooked that whenever dollar gains back its value, even if after a lot of months, price of gold is going to decline.
The value of dollar and the price of gold always move in opposite directions. This trend is not evident on the daily basis and requires about 12 months to prove its relationship. The relationship is due to the fact that gold is just another form of currency that trades in the global market.
The recent trends signify that when the dollar weakens in the foreign exchange market over an extended period of time, the gold prices generally rise during that period. This is the reason why gold is referred as a hedge during inflation.
It is not possible for gold price and the value of dollar to follow the same trend throughout the course of time. It has certainly seen some temporary periods of decoupling. Over the decades, there have been few occasions when gold and dollar drifted from their inverse relationship. The most prominent divergence occurred during three years from 1978 to 1980. This trend was evident from the studies conducted on the US gold price in dollars and in the Swiss Franc.
The above mentioned points suggest that gold is not a continuous evasion from inflation. It very vibrantly puts forward the reality that gold, contrasting any of its cohort metals like silver, platinum and palladium, is certainly a short-term sanctuary hedge against recession and decline.
Another period when the relationship between the value of dollar and the price of gold violated the conventional trend was from May-December 1993. The comparison between the value of dollar and the price of gold showed that they had a strong positive correlation during this period.
The significant exception occurred between May-November 2005, which was a 6-month de-coupled tenure during the 10 years of strong traditional relationship. During this period the correlation between the dollar and the value of gold was as high as 0.66.
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