Through the lens of gold
The opinions expressed in this report are those of Inspirante Trading Solutions Pte Ltd (“ITS”) and are considered market commentary. They are not intended to act as investment recommendations. Full disclaimers are available at the end of this report.
Highlights
What is gold, really?
Gold occupies a unique position in the financial market.
It has not only been a cornerstone of wealth and prosperity but also one of humanity's earliest forms of money. In the realm of economics, "money" is traditionally defined by its three functions: a store of value, a unit of account, and a medium of exchange. Gold remarkably satisfies all these criteria, standing out across time as the quintessential form of money. While history has seen various objects and materials serve as currency—from shells to grains—gold has consistently outperformed these alternatives. Its superiority can be attributed to several intrinsic characteristics: durability, portability, divisibility, uniformity, limited supply, and widespread acceptability. These attributes ensured that gold remained the preferred standard for centuries, facilitating trade, wealth storage, and economic stability across civilizations.
The journey of gold in the United States offers a fascinating glimpse into its evolving role within the global financial system. Before the Bretton Woods agreement in 1944, gold played a central role in the U.S. monetary system, backing the value of the dollar and instilling confidence in the nation's currency. The Bretton Woods system itself was a testament to gold's enduring value, establishing fixed exchange rates anchored by the U.S. dollar's convertibility into gold. However, the dissolution of Bretton Woods in 1971 marked a pivotal shift, severing the direct link between gold and fiat currencies. This transition heralded a new era of monetary policy, characterized by floating exchange rates and the dominance of fiat currencies.
Figure 1: Gold price (in USD)
In the post-Bretton Woods era, perceptions of gold have undergone significant transformation. Increasingly, individuals question gold's relevance in a modern financial portfolio, with some dismissing it as a "barbaric relic" of a bygone era. This skepticism reflects broader changes in monetary policy, economic theory, and investment strategy. However, such views overlook gold's enduring attributes and its historical resilience as a store of value. Gold continues to play a crucial role in diversifying investment portfolios, hedging against inflation, and serving as a safe haven in times of economic uncertainty. It remains a critical asset for investors seeking to preserve wealth over the long term, embodying a form of "true" money that transcends the limitations of contemporary fiat currencies.
What influences gold price?
Understanding the factors that influence gold prices is crucial for any analysis of its role in the financial markets. While it's a common perception that the U.S. dollar significantly affects gold prices—given that gold, like many commodities, is denominated in USD—this relationship exhibits variability over time. A nuanced examination reveals that the correlation between gold prices and the U.S. dollar (often tracked using the U.S. Dollar Index, DXY, as a proxy) is not consistently strong across all periods. For instance, from early 2022 to the beginning of 2024, the correlation between gold and the DXY has been marked with periods of synchronicity and divergence (Figure 3), suggesting other drivers at play in determining gold prices.
Figure 2: Gold price (in USD) vs. DXY (inverted) since 1973
