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How the value of the U.S. Dollar impacts the real price of gold.

The U.S. dollar is known for having an inverse relationship with the price of gold, which is traded on international markets and is quoted in dollars.

Therefore, foreign buyers in their domestic market where gold is priced in their local currency would have to pay the real price of gold, which includes their currency exchange value to the U.S. dollar, in addition to what’s set by supply and demand.A portion of the gold price thus reflects any changes in the value of the dollar, independent of the gold supply and demand.

When suppliers to a domestic market have sourced the gold from international trades, to quote to their local customers how much they really have to pay, they must consider the U.S. dollar exchange rate to their local currency. Since no country can have a pure domestic gold market totally isolated from international trading activities, the real price of gold for buyers everywhere in the world is further impacted by the value of the dollar.

The value of the U.S. dollar changes from time to time in the form of exchange rate through trading on foreign exchange markets and so does the price of gold that is set in dollar. Two things influence the dollar value the most: the U.S. trade balance and its net capital flows.

Currently the U.S. runs a trade deficit with ever-increasing imports and net capital in-flows as both Treasury and corporations continue to borrow from other countries. While trade deficit weakens the dollar, net capital inflows can actually strength the dollar.

When the U.S. dollar declines in value, gold price on international markets is likely priced up consequently. But if the exchange rate between the U.S. dollar and one’s local currency didn’t adjust at the same pace as the change in gold price, one could end up paying more in the local currency for the same amount of gold.

When the U.S. dollar increases in value, gold price on international markets is presumably priced down accordingly. Again, but if the exchange rate between the U.S. dollar and one’s local currency didn’t adapt at the same clip as the change in gold price, one could still end up paying more in the local currency for the same amount of gold.

Whenever the U.S. dollar changes in value, the price of gold will always follow its suit. And because no gold investors can escape from the worldwide gold trading system, the real price of gold that foreign buyers pay will invariably incorporate their currency’s exchange rate to the U.S. dollar.

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