When the US Dollar gets stronger, it takes fewer dollars to buy any
commodity that is priced in $USD. When the US Dollar gets weaker it
takes more dollars to purchase the same commodity.
The price of all US Dollar denominated commodities, like gold,
will change to reflect the fact that it will take fewer or more dollars
to buy that commodity. So it’s quite possible, in fact it’s almost
always the case that a portion of the change in the price of gold is
really just a reflection of a change in the value of the US Dollar.
Sometimes that portion is insignificant. But often the opposite is
true where the entire change in the gold price is simply a mathematical
recalculation of an ever-changing US Dollar value.
When the dollar gets strong, gold appears
to go down, and vice versa. That accounts for part of the fluctuations
that we see in the value of gold.
The other part is an actual
increase in the supply or demand for gold. If the price is higher when
being measured not only in US Dollars, but also in Euros, Pounds
Sterling, Japanese Yen, and every other major currency, then we know
the gold demand is higher and it has actually increased in value.
if gold is higher in US Dollars while at the same time cheaper in every
other currency, then we can conclude that the US Dollar has weakened,
and that gold has actually lost value in all other currencies. But the
price, because it is being quoted in $USD will be higher and give the
illusion of gold becoming more valuable. In such a case the devaluation
of gold, due to increased supply on the market, is camouflaged by a
weakened US Dollar.
Our feature on kitco.com breaks the change of the price of gold into 2 components.
One part shows you how much of that change can be attributed to US Dollar strength,
or lack of it. The other portion is indicative of how much the price changed as a
result of normal trading. Interestingly whatever changes happen to the price of
gold as a result of US Dollar strength/weakness also occurs to every other US
Dollar denominated commodity by the exact same proportion.