Are high gold prices signaling a dollar collapse?

Key points

• Gold has rallied $100 in 10 days
• Gold has only closed above $2,000 on 1% of trading days since 2010
• USD and gold are negatively correlated around -0.70

Gold prices near highs

In only 10 trading days, gold futures (/GC) have rallied over $100 to reach $1970 on Wednesday. Driven by geopolitical fear, gold volatility (GVZ) is also up 8% this month. While prices could go higher, there is little historical support for prices over $2000. Since 2010, gold futures have only closed above $2000 33 times - equating to 1% of the time.

Gold's impact on USD

Historically, gold futures tend to move inversely with US dollar as each asset strengthens under different types of global uncertainty. The start of the COVID-19 pandemic, for example, saw gold prices skyrocket while USD flattened since global fear was high and the US economy fell stagnent. Over the past 10 years, gold's correlation to USD has been exclusively negative - this year the correlation has strengthened all the way to -0.70.

Given the recent strength of both assets, traders begin to speculate whether one is bound to fall given historic correlations, or if the current global landscape will allow recent trends to persist. Several scenarios for future direction exist. Fear could push US yields and potentially USD lower, or fear could subside pushing gold lower. Alternatively, global fear could continue and the US could continue to outperform - leaving both assets to hold onto gains.

How to trade US dollar

1. Open an account to get started, or practice on a demo account
2. Choose your forex trading platform
3. Open, monitor, and close positions on USD pairs

Trading forex requires an account with a forex provider like IG. USD pairs can be found in IG's platform under the 'USD Pairs' pairs tab. Many traders also watch major forex pairs like GBP/USD and USD/JPY for potential opportunities based on economic events such as inflation releases or interest rate decisions. Economic events can produce more volatility for forex pairs, which can mean greater potential profits and losses as risks can increase at these times.

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