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How is the US Dollar and Gold Linked?

Gold remains one of the world’s most coveted commodities, much as it has for thousands of years. But why is the precious metal so highly prized? And...

24 May 2022

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Gold remains one of the world’s most coveted commodities, much as it has for thousands of years. But why is the precious metal so highly prized? And what connection does it have to the US dollar and the value of day-to-day currency?

To find out, we’re taking an in-depth look at gold and its relationship with the US dollar. We’ll trace its history and background, highlighting how it has helped shape our economy, and why it’s still considered such an important resource today.

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What is Gold’s Role in Modern Currency Systems?

Gold remains a universal wealth and value indicator around the world. Since ancient times, it has proven an efficient, reliable, durable, and consistent source of value, and so it is still widely accepted as a global barometer of economic and political health.

When an economy is struggling, the value of gold has historically been seen to increase. This is through increased demand for what many see as a stable and consistent asset, and one not easily shaken by geopolitical turmoil or governmental weakness.

The same is usually true in reverse when an economy is prospering. In peacetime, when a fiat currency is performing with no signs of recession or inflation, the value of gold tends to drop. This is through decreased demand.

Interested to learn more about what affects the price of gold and how it relates to global currency systems? Read our comprehensive guide.

How is the US dollar and gold links

How Are Gold and the US Dollar Linked?

Gold has long been associated with the US dollar. Indeed, the precious metal is currently denominated in dollars, no matter where in the world it’s traded.

The US first adopted the gold standard in 1834. This meant that the government agreed to convert a fixed amount of gold into paper money, for the purposes of day-to-day use.

The gold standard is considered a stable and efficient means of controlling inflation, ensuring that the issuance of money is maintained in the long term. However, in 1931 the US stopped using the gold standard, with the system phased out completely by 1973. In between, the Bretton Woods Agreement established the first international currency exchange, which pegged the US dollar to the value of gold at a fixed rate of $35 per ounce. Though relatively short-lived, the agreement led to the creation of the International Monetary Fund (IMF) as well as the World Bank.

In 1973, the US gold standard was replaced by fiat money, which effectively means that government issued money, not backed by gold, is accepted as a means of payment.

Still, even after the abandonment of the gold standard, gold and the US dollar remain closely linked. The per-ounce cost of gold is directly affected by the value of USD; when the dollar is high, demand for gold (and therefore value) is likely to drop; when the dollar is weak and inflation is rising, gold prices tend to leap as investors look to protect their assets from diminishing fiat values.

Links between gold and US dollar

While there is no official relationship between gold and USD, the values of each tend to oppose one another. This is largely down to external factors like economic performance, monetary policy, and supply and demand, not to mention overall investor sentiment.

At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.
To learn more, visit our homepage or give us a call at +44(0)203 915 8111.

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