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Why the US Dollar Index and Gold Price fell together?

As the world's two most important reserve assets, the US dollar and gold can be substitutes for each other, and in most cases their prices are negatively correlated. Since gold is traded in US dollars, a depreciation of the US dollar will most likely lead to an increase in the price of gold, and vice versa. This logic fails in a few cases, such as when the Covid-19 outbreak in March, gold price and the US dollar index fell sharply together due to a liquidity crisis caused by market panic. Recently, the trend of the US dollar index and gold price have once again synchronized.

Exhibit 1. ICE US Dollar Index futures trend

Since November, the US dollar index has depreciated more than 3% in a single month to a low of 91.1, breaking the previous three-month range.

Exhibit 2. COMEX Gold Futures trend

At the same time, the price of gold was falling. COMEX Gold futures quotes for December contract fell from $1,966 on Nov. 9 to $1,767 on Nov. 30.The maximum drop in less than a month was as high as US$200 per ounce!

What caused the US dollar index and gold price to fall together?

Risk aversion

The main reason for the sharp decline in price of gold is the fading of risk aversion. The trigger was the release of Phase III clinical data for three vaccines in the past month: on November 9, Pfizer/BioNTech announced that the initial efficacy rate of the vaccine exceeded 90% and on November 18 they announced a final efficacy rate of 95% [1]; on November 12, AstraZeneca announced that its vaccine had an average efficacy rate of 70% [2]; on November 16, Moderna announced that its vaccine is 94% effective [3]. One by one, the good news of vaccine has greatly weakened the support of the Covid-19 factor for the gold price. In addition, the current daily new confirmed cases in the U.S. is still over 100,000 per day while the trend chart shows that the spread of the Covid-19 has slowed.

Exhibit 3. Trend of daily new Covid-19 cases in US

The orderly transition of presidential power to the President-elect Biden is another reason for the risk aversion receding. Secretary of State Mike Pompeo said in an interview with Fox News on the 24th that Trump had directed them to conduct the transition in accordance with the decision of the U.S. General Services Administration. The Office of the Director of National Intelligence (ODNI) also said on the same day that the White House had given them permission to provide a daily presidential briefing to Biden to facilitate the transition of power [3]. Although Trump remained reluctant to concede defeat, he chose to abide by the rules of the game, which allayed market fears and meant that a great deal of uncertainty was swept away.

The fading of risk aversion determines the downward trend of gold price. In most cases, the fading of risk aversion is accompanied by the expectation that the economy will recover in the future, which has a positive effect on the dollar index. But in the last half month, there has been a time lag in the transmission of this logic. Although the risk aversion has receded, the expected timing of both the economic recovery and the liquidity tightening have been delayed.

Liquidity Expectations

The US economic downturn hinders US dollar index’s rebound. The US October retail sales released on the 17th increased by 0.3% month-on-month, lower than the expected 0.5% and even lower than September's 1.9%, which is the lowest level in the past six months [4].In addition, there has been a recent deterioration in employment, with initial jobless claims released on November 26 rising to 778,000 from 742,000 the previous week. Objectively, current initial jobless claims have improved from October, but the pace of recovery is significantly slower than previously expected,reducing the support for the dollar index.

Exhibit 4. Trend of Weekly US initial Jobless Claims

The minutes of the Fed meeting released on November 26 show that officials discussed adjusting the asset purchase program if necessary to provide more stimulus to the economy, with no need to raise interest rates in the short term [5]; on the other hand, after Biden's victory, he quickly began selecting cabinet members and has nominated former Fed Chair Yellen as Secretary of the Treasury [6], who as a prominent dove had proposed a large fiscal stimulus package to revive the economy.

The slowdown in the economic recovery and Yellen's nomination in November changed the market expectation. Since liquidity would be easier in the future, the dollar might face greater depreciation pressure.

The impact of Bitcoin

In addition to its hedging properties, gold also has the function of anti-inflation. In the past, when faced with an easing environment, investors often allocated some gold to resist potential inflation. Unlike history, a special situation this year is that investors with large capital began to use Bitcoin as an alternative in a easing environment. Due to the adjustment of asset allocation by some large funds, the price of gold was temporarily disturbed.

Exhibit 5. Performance Comparison of Bitcoin Price (Purple line) and Gold Price (Yellow Line)

While gold price fell recently, Bitcoin price has been rising and hitting record highs. Inigo Fraser-Jenkins, a strategist at Sanford C. Bernstein, wrote: Bitcoin will not replace gold, but if the macro outlook for the future is increasing inflation and rising debt levels, both have room for growth. JPMorgan analysts believe that investors, including family offices, are selling their gold holdings and turning to digital currencies. Since Nov. 6, funds investing in gold have cut their positions by about 93 tons, worth about $5 billion. However, the funds flowing into the Grayscale Bitcoin Trust have doubled since early August[7]. Because both gold and bitcoin have anti-inflationary properties, the funds invested in bitcoin may be funds that have been invested in gold. Under the influence of diversified asset allocation, the dilution of gold buying could be one of the reasons for the recent poor performance.

In general, vaccine’s optimistic outlook and the smooth transition of presidential power have led to a rapid fading of risk aversion and established a downward trend in gold. The weakening of the US dollar index is mainly due to expectations of an extremely easing environment. And the diversion of funds invested in bitcoin has inhibited the rebound of gold. Under the influence of these three factors, gold and the US dollar have both fallen sharply in the past month.

In the short term, it is difficult to see the trigger point for the appreciation of the US dollar index under the easing monetary policy and the upcoming fiscal stimulus. In the long term, the risk aversion carried by gold has faded and the main pricing logic of gold will return to anti-inflation. With the improvement of the global economy and the depreciation of the US dollar, gold may have a rebound and the price relationship with the US dollar will likely be negatively correlated.


[1] 金融界,金融界网站《辉瑞最新疫苗数据令人惊喜 全球市场集体飙升》


[2] 环球社会热点,香港经济日报《11款属最后阶段 辉瑞Moderna同报喜》


[3] 李焕宇,观察者网《蓬佩奥:将依法完成权力移交工作》


[4] 汇通网,新浪财经《“恐怖数据”美国10月零售销售不及预期,疫苗问世希望或带动未来消费》


[5] 季丽亚,和讯网《美联储11月会议纪要:官员对未来购债路径存分歧》


[6] DF353,环球网《拜登确认提名耶伦为美财政部长》


[7] 曹泽熙,华尔街见闻《华尔街最火的辩论:买黄金,还是买比特币?》



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