Gold vs US Dollar (XAU/USD)

The XAU/USD trading pair indicates the exchange rate between XAU, the ticker for gold, and the United States dollar (USD), or how many USD it takes to buy one ounce of gold. The letter "X" stands for "Index," whereas the letter "AU" stands for "Aurum," the Latin word for gold. Gold is also traded against popular currencies, including the Australian dollar (XAU/AUD), the Swiss franc (XAU/CHF), the euro (XAU/EUR), and the British pound (XAU/GBP).

Gold is a precious metal prized throughout history due to its lustrous appearance and limited availability. It has been used for jewellery and ornaments, and now finds uses in electronics, medicine, and even fine dining.

Gold is extracted through a costly mining procedure. Newly mined gold supplements the current supply. Unlike other commodities, such as oil, which is only used once, gold quantities produced remain in circulation and can be recycled and reused in the future.

Used historically as currency, gold was used to establish the gold standard, in which paper money was redeemable for gold. In the past, several countries pegged their currencies to gold. While this is no longer the case, it remains a form of liquid reserve for a portion of central banks’ savings.

Gold is a vital element of finance and investing, often seen as a safety net against economic uncertainties and a source of returns for investors. For the purposes of safeguarding their currency, central banks hold gold in physical form, as it remains a reliable means of storing value, even though it is no longer the primary form of currency. XAU/USD is regarded as a safe-haven asset, making it an appealing addition to a portfolio. When economies are unstable, gold tends to maintain or even increase in value. Therefore, when traditional markets are under duress, gold traders can profit from price fluctuations.

The history of gold dates back to ancient civilizations. Despite the rapid evolution of financial markets during the 20th century, the precious metal maintained its prominent position. During the Great Depression and the two World Wars, the price of gold fluctuated substantially.

After World War II ended, the Bretton Woods Agreement was established, and US dollars were convertible to gold at a fixed exchange rate of $35 per ounce. After the agreement collapsed in 1971, gold began to float freely on the market. Prices spiked during the 1970s, driven by inflation and political uncertainty.

After a prolonged period of stagnation, gold prices started to rise again rapidly during the 2000s. Geopolitical uncertainties, financial crises, and rising inflation all contributed to gold´s long bull run. After a mixed performance in the first half of the 2010s, gold eventually resumed its uptrend amid rock-bottom interest rates.

The price of XAU/USD is influenced by the demand for gold by sectors of primary consumers:

• Jewellery is the most popular consumer product in countries such as India and China, where gold ornaments have cultural significance.
• Gold is acquired by investors for portfolio diversification, risk mitigation, and speculative purposes.
• Industrial applications such as electronics, dentistry, and medicine take advantage of gold's distinctive properties.
• Central institutions are the primary purchasers of gold, using it to diversify their portfolios and support their currencies. They may purchase or sell gold based on monetary policy objectives and assessments of the global economy.

Furthermore, the opportunity cost of holding gold relates to the returns that investors could obtain from alternative assets like bonds or stocks, which generate interest or dividends. Gold, in contrast, does not generate income, so when interest rates rise, investors may choose to sell gold and invest in assets offering higher returns. Central banks periodically disclose their gold holdings and transactions, influencing market expectations and sentiment.

Supply fluctuations significantly impact the price of XAU/USD. Gold supply derives from mining operations, central bank sales, and precious ore recycling. Mining, despite scarce new discoveries, still provides 75% of the supply, and the emergence of fresh deposits can exert downward pressure on prices.

Gold's status as a safe-haven asset also contributes to price surges during periods of global turmoil, trade conflicts, or natural disasters. Economic uncertainties, characterised by mounting inflation and declining interest rates, enhance gold's appeal as an asset, as cash holdings become less attractive. Additional factors impacting gold prices include Gross Domestic Product (GDP) growth, economic instability, and market volatility.

As XAU/USD is denominated in US dollars, there is an inverse relationship between the commodity and the currency. Gold tends to weaken when the dollar strengthens, whereas a dollar depreciation typically raises gold prices. Expectations and announcements regarding US interest rates have a significant impact on this dynamic.

Additionally, the London Bullion Market Association (LBMA) sets the global standard for gold pricing.

Beyond these factors, market participants' perceptions of gold as an investment can trigger speculative trading, leading to short-term price fluctuations.

Traders of XAU/USD should monitor data releases and statements from influential organisations impacting gold prices. These include:

• Major central banks worldwide including the United States (Federal Reserve), the eurozone (ECB), Japan (BOJ), China (PBoC), and Australia (RBA) for monetary policy decisions and statements.
• US Treasury Department statements related to US fiscal policy and debt.
• Gold mining companies for data on production volumes, exploration updates, and financial performance.
• Commodity exchanges like the COMEX (Chicago Mercantile Exchange) play a role in determining gold futures prices, which can influence spot gold prices.
• Retail and wholesale associations related to jewellery, bullion, and precious metals can provide insights into physical demand for gold.
• Organization of the Petroleum Exporting Countries (OPEC) as oil prices and geopolitical developments related to oil production can impact gold prices.