Special Relationship between XAU and USD
Since gold is priced in US Dollars, it has a special correlation with the greenback. As a rule, when the value of the USD rises against other currencies, gold price fall in USD terms. Conversely, as the value of USD depreciates, XAU tends to appreciate, since it becomes cheaper in terms of other currencies.
Historically, one of the key influences on gold prices has been the real interest rates of the US:
- Low real interest rates lead to low or negative returns on investments in cash and bonds, which pushes investors to seek alternative sources of investment. This drives gold higher.
- High real interest rates lead to robust returns from traditional investments, which reduce the appeal of gold. This drives gold price down.
The US Federal Open Market Committee (FOMC) meeting, which takes place once every few weeks, gives an idea about the state of the US economy. If the FOMC takes a stance that implies that interest rates could rise in future, the USD tends to strengthen, while the gold prices might decline.