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How the U.S. Dollar Affects Precious Metals Prices

For centuries, Precious Metals have been used as a store of value for both individuals and nations. Gold, Silver and Platinum continue to serve as critical assets, traded in the marketplace and stored in troves by most governments. Modern market histories have carefully recorded economic performance and market growth over the last 100 years, and these numbers help us understand precisely how the U.S. dollar affects Precious Metals prices.

Valuing the U.S. Dollar

The primary measurement of value for the U.S. dollar is exchange rates, which are determined by comparing factors such as current American interest rates, debt levels and economic strength in the global market. Exchange rates establish the amount of currency from a particular foreign country necessary to exchange for one U.S. dollar. Other factors that contribute to determining the value of the dollar include oil prices, confidence among consumers and unemployment rates.

Inflation affects currency values, as well. When the United States is experiencing high levels of inflation, currency worth goes down in relation to other free trade markets. When inflation is low, purchasing power tends to increase, raising dollar values.

Precious Metal Prices

Gold, Silver and Platinum are dollar-denominated assets, which means they are globally traded in U.S. dollars. Because of this connection, the Precious Metals market is directly affected by fluctuations in the American economy. Financial patterns suggest the price of Precious Metals has an inverse relationship with the U.S. dollar. When the U.S. dollar becomes stronger, the cost of Gold and Silver generally remains low. When the U.S. dollar weakens in value, prices tend to rise. This interrelationship began in 1933 when the United States disrupted the Gold Standard. Approximately three decades later, in 1968, the price of Precious Metals was fully determined by private markets. Central bank transactions were still controlled by the government but Gold prices rose, influenced by the private sector rather than regulations. 

People are more likely to invest in dollars when the currency has a high level of value. During severe economic periods, investors tend to look toward Precious Metals as a more stable option. Even though this inverse relationship has proven to be true many times throughout the last few decades, there have been exceptions. When global demand for Silver, Gold and Platinum are high, the value of the U.S. dollar can rise in tandem with the price of Precious Metals. It is also important to note when the Precious Metals market is strong, shares in mining typically go up in value.

Since it is unlikely America will reinstate a Precious Metals-backed money system, the inverse relationship will undoubtedly continue. That means Gold and Silver will be a necessary hedge against inflation for the foreseeable future.

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