Traditionally, there has been a close-knit relationship between the performance of
precious metals and the US dollar. One of the metals that features mostly in regards to this relationship is gold. The metal and this currency normally trend together. The US Dollar can take a bullish turn. Whenever this happens, the price of gold takes a bearish direction. The opposite is also true. Part of this see-saw relationship is the fact that the US Dollar is currently the accepted reserve currency around the world. Gold is also an alternative store of value. As such, competition between the two is inevitable. However, recent studies have indicated that a new element is more significant to the performance of gold prices than this competing currency.
- How the stock market is important in this case
According to comprehensive analyses, a weakness in the overall stock market is more beneficial to gold than a downturn in the US Dollar. For many years, this precious metal has consistently underperformed in relation to the stock market. This has always been the barrier which prevents a real bull run on its price.
Historical records support this finding. As indicated in a chart presented in GoldSeek, there have been 3 bull markets for this precious metals since 1960 to date. In each of these, gold did not perform better than the stock market. Gold only beat the performance of the stock market in 1987 when the latter experienced a major crash. This elicited lower interest rates from the Federal Reserve so as to boost cash flow and restore investor confidence in the stock market. The move resulted in a boost for gold. This means that when interest rates are high, the stock market rises and this precious metal reduces in value. The opposite is also true.
- What does this mean for bullion investors?
In a bid to predict the direction that gold’s value will take, it is important for investors to learn that inflation leads to a gold bull run. This is because it creates a bear attitude characterized by dropping multiples in the stock market. Eventually, this creates a reduction in profit margins for corporations and they have to seeksecurity by investing in gold.
With this in mind, investors can make informed decisions on when to buy gold bullion or sell it. While examining this see-saw relationship, it is easy to completely
ignore the US Dollar. Investors should remember that this currency also holds water in regards to the value of the yellow precious metal. That’s because the rise or fall of the greenback has some effect on the value of gold. However, a big bull run for the precious metal depends much more on the performance of the bourse.
For ages, gold has been regarded as the most valuable commodity in the world. Revolutions and major geopolitical decisions have occurred because of it. Traditionally, these factors impacted on its value. However, this dynamism has changed. The stock market now lords over the value of gold. The two elements have a see-saw relationship that does not have an end in sight. This is a very important factor for current and future gold investors to know.