The US dollar and gold are among the most popular trading instruments and find a place in investor portfolios. Both are highly responsive to economic indicators and enjoy significant liquidity. Here’s a look at the correlation between the two.

The Negative Correlation Between USD and Gold

Both US dollar and gold have offered positive returns in the longer-term horizon. For instance, between 2013 and 2023, gold prices climbed around 160% and the US dollar index (which measures the USD’s performance versus a basket of major peers) offered returns of close to 30%. In the short-term, however, the greenback and the yellow metal tend to exhibit a negative correlation. This means that when one rises, the other declines. This inverse relationship exists because:

  • Gold and US dollar are both safe-haven options, which is why they compete for space in a trader’s or investor’s portfolio. Retail traders and investors usually have a smaller capital layout and typically choose one of the two to safeguard their returns during periods of uncertainty.
  • Gold is traded in US dollars in the global financial markets. So, when USD weakens, XAU becomes cheaper for traders and investors using currencies other than the US dollar to trade. When gold becomes cheaper, its demand rises, sending the yellow metal higher.
  • Inflation is another reason for the negative correlation. High inflation in a country erodes the value of its currency. When this happens, the currency declines. Meanwhile, gold is considered a hedge against inflation. So, when there is high inflation in the US, it would exert a downward pressure on the greenback and an upward pressure on gold.

Does the Negative Correlation Always Hold True?

No, there are circumstances under which the inverse correlation between the US dollar and gold break, sending them in the same direction. For instance, in the second quarter of 2024, both USD and XAU appreciated. This was because elevated interest rates in the US supported the greenback, while uncertainties due to elections in many countries and rising demand from central banks sent the yellow metal higher.

Will Trump’s Policies Support the Greenback?

The US Presidential election in November 2024 saw Donald Trump winning for a second term, beginning January 20, 2025. Trump’s pro-business policies are widely expected to spur economic growth in the US and support the greenback.

The new administration plans to extend and expand the Tax Cuts and Jobs Act (TJCA). Lower taxes boost consumption, driving demand for businesses and triggering economic growth. They also plan to lower taxes on corporate profits from 21% to 15%, which could make the US one of the lowest tax jurisdictions among rich countries. A lower corporate tax rate means better profitability, which can either translate to higher wages or business investments towards innovation and growth. Tax cuts and deregulation will support businesses and, in turn, the US economy and strengthen the greenback.

On the other hand, Trump’s protectionist policies are expected to act as a dampener. Being an advanced economy, most manufacturing companies convert imported raw materials into finished goods. High import tariffs would increase the price of raw materials. Businesses will try to pass this cost to consumers, reigniting inflation. Companies that cannot pass on the cost will have less funds available to invest in growth, preventing job creation.

The US Federal Reserve, which cut its benchmark interest rates by 50 basis points (bps) in September 2024 and by 25 bps in both November and December, is likely to slow the pace of rate cuts in 2025 due to elevated inflation. Fed officials suggest only two cuts of 25 bps each in 2025. Higher interest rates attract investors to the high-yielding currency, pushing its demand.

All these factors suggest a US dollar rally in 2025.

What About Trump’s Impact on Gold Demand?

Gold is perceived as a safe investment during periods of high political, economic and geopolitical uncertainties. Last year was one of heightened uncertainties, with geopolitical tensions mounting and over 60 countries going to the polls. These factors resulted in a gold rally in 2024.  Will the yellow metal lose its shine in 2025? Not necessarily. Here’s why:

The new US President is known for changing his stance based on his whims and fancies, while his tweets have the power to move markets. For instance, his protectionist stance called for curbing the H-1B visa program, which allows US companies to hire foreign workers. In sharp contrast, his speeches support the program, as it has played a key role in the growth of tech majors. Similarly, his tweets about owning Greenland and making Canada the 51st US state created a stir. The volatility of the Trump era could make investors more cautious, supporting safe havens like gold.

The Trump administration could exert pressure on the US Fed to continue cutting interest rates to support economic growth. While economic growth could propel the US dollar, any cut in interest rates will support the non-yield yellow metal.

Donald Trump’s sweeping tariff reforms could trigger inflation. This could boost the demand for gold, which is used to hedge against inflation. US tariffs would also stifle growth in countries that export to the US, creating global economic uncertainties and supporting the demand for gold.

US companies may face demand shortages as other nations impose retaliatory tariffs. This may further affect the trade and debt balance of the world’s largest economy, threatening the stability of financial markets worldwide and pushing the demand for gold.

Trading Gold and US Dollar

The negative correction between gold and the US dollar may return or the positive correlation seen in 2024 may solidify into a trend. Whatever the case may be, it’s a good idea to stay abreast of the news and watch the most market-moving economic releases. Of course, continue learning to make smarter trading decisions.