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How the U.S. Dollar Influences Precious Metals Prices

Published on 1/7/2022 by APMEX

Various stacked Silver coins on a black background.

As the leading global currency, the U.S. Dollar is the base currency for Precious Metals prices, meaning in the world markets, Gold and Silver are typically bought in U.S. Dollars.

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.


Precious Metal Prices

The price of Precious Metals, such as Gold, Silver, Platinum and Palladium, is called their spot prices. Spot prices are the current price that Precious Metal can be bought and sold for immediate delivery. Spot prices constantly fluctuate during global market hours, making it vital to keep up to date on performance indicators because they significantly affect the buying and selling of Precious Metals.

Spot prices can vary from one Precious Metal to another. Still, there are a few common factors that influence spot prices: 1) economic conditions, 2) currency exchange rates, 3) speculation and 4) supply and demand. Their availability also affects the price of Precious Metals. If the product is in high demand, then the spot price will increase. The Precious Metals in the highest demand are referred to as "favored" Precious Metals for that day.

Precious Metal spot prices can be viewed on financial news networks and online precious metal sites, such as APMEX's Live and Historical Spot Price Charts.


The U.S. Dollar

Exchange rates for the U.S. Dollar are determined by analyzing factors like current American debt levels, interest rates and global economic market strength. Other considerations for the U.S. Dollar are unemployment rates, consumer confidence, inflation rates and recent oil prices. Gold, Platinum and Silver are all dollar-denominated assets because all global markets measure them in U.S. Dollars.

The U.S. Dollar was chosen as the global standard for Precious Metals prices because of the United States' strong and stable economy. When the dollar strengthens, commodities worldwide become more expensive in other nondollar currencies. This effect tends to influence demand negatively, and as you would expect, when the dollar weakens, commodities prices in other currencies drop lower, which increases demand.


The U.S. Dollar and Precious Metals

With the dollar being used in so many international transactions, it's no surprise that Precious Metal prices are tied to the dollar. This is particularly evident during times of economic crisis when investors flock to Precious Metals as a haven investment and hedge against inflation.

Since the early 1970s, as the U.S. moved away from the Gold Standard, Precious Metals and the U.S. Dollar has shown a relative inverse relationship in their financial patterns. If the U.S. Dollar is stronger, the cost of Silver and Gold typically stays low. When Dollar exchange rates weaken, Precious Metal prices tend to rise. A prime example of Precious Metal prices spiking when the U.S. Dollar weakened was in mid-2008 when it was apparent the U.S. was on the verge of a financial collapse. As an additional example, Precious Metal prices fell as the dollar strengthened in mid-2014 when investors began to fear that global economic growth would be more substantial than expected and interest rates would rise.

Investors are less inclined to buy dollar-denominated Precious Metals when dollar values are high because the purchaser gets less for their money. This is why, when the Fed hikes interest rates, Precious Metals are negatively impacted because higher interest rates will increase the demand for dollar assets and make the dollar stronger. This model is especially true for anyone using non-American currency since exchange rates against a strong dollar will be low. Exceptions include times when the U.S. economy is strong and manufacturing demands for Precious Metal are also on the rise.

The Bottom Line

A stronger U.S. dollar tends to keep the price of Precious Metals lower and more controlled, while a weaker U.S. dollar is likely to drive the prices higher through increasing demand; more Precious Metals can be purchased when the dollar is weaker.

While the relationship between the value of the U.S. Dollar and Precious Metals is important, the dollar is not the only factor affecting the prices. Other factors that affect the value of all Precious Metals and the dollar are interest rates, inflation, monetary policy, geopolitical events and supply and demand, among countless other factors.

Despite any current standings of the dollar, Precious Metals are still viewed as a great hedge to protect against economic events like currency devaluation or inflation. In addition, Precious Metals are considered protection during periods of political instability as well.

Like Gold and Silver, Precious Metals make for great investment opportunities; for any questions regarding the eligibility of any specific products in your investment portfolios, APMEX recommends consulting a financial advisor or professional.

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