The Price of Gold as a Hedge Against the US Dollar

Abstract

We address the issue of whether the dollar (US dollar) price of gold can be used to hedge the external purchasing power of the dollar. We decompose the dollar price of gold into two parts: a global price of gold and a global price of the dollar. We find that there is no correlation between fluctuations in the global price of gold and fluctuations in the global price of the dollar, or fluctuations in the global price of any individual currency. We show that the observed negative correlation reported in the literature between fluctuations in the dollar price of gold and fluctuations in the dollar is caused by the appearance of the dollar in both variables. The dollar appears in the dollar price of gold with a negative sign that tilts the correlation with fluctuations in the dollar towards negative one.