Gold and Currencies

Abstract

It is well known that US dollar gold prices are negatively related to the value of the US dollar and that gold prices denominated in other currencies are negatively related to these currencies. But how strong is this relationship for each currency and what is its cause? This paper provides new evidence on the strength of the negative gold-currency association. For example, a one percent increase in the US dollar leads to a one percent decrease in the US dollar gold price and this relationship holds for all major currencies on a daily basis. The finding implies that gold is a globally traded asset. A multivariate analysis further suggests that gold functions as a global currency benchmark.

Keywords: gold, exchange rates, law of one price, numeraire, commodities, VAR

JEL Classification: G10, G15, F31