What Happens When Gold Prices Drop

Although gold is no longer a standard form of currency in the vast majority of countries, it is still of extreme macroeconomic importance. The price of gold is tied to many currencies and currency pairs. Here is what happens to the major currencies when gold prices drop:

US Dollar: The US Dollar and gold have what is called an inverse relationship. When gold prices rise, the US Dollar drops. People use gold to protect against inflation and recessions. But in times when the US Dollar is in high demand, investors tend to take offload their gold in exchange for US Dollars. So in general, the US Dollar and gold move in opposite directions; when gold prices drop, the US Dollar rises.

AUD/USD: Australia is the third biggest producer of gold in the world.  So when the price of gold rises, it is the beneficiary.  However, when the price of gold drops, the AUD/USD price drops because Australia’s currency is tied to the price of gold.  Remember, the Australian dollar is tied to the price of gold and will generally head the same direction as the price of gold.  In this specific pairing, the Australian dollar is sold if the price of gold drops, making the USD stronger relative to the AUD (because the AUD is worth less, and not because the price of USD rose).

NZD/USD: New Zealand is also one of the top producers of gold in the world.  And as such, the New Zealand dollar will generally head the same direction as gold.  So if the price of gold falls, the NZD/USD currency pair falls as well.  In this specific pairing, the New Zealand dollar is sold if the price of gold drops, making the USD stronger relatively, meaning the USD is stronger relative to the NZD because the NZD is worth less as people sell it. This is the same situation as the AUD/USD scenario.

USD/CHF: The Swiss Franc will also move in the general direction of gold as Switzerland’s reserves are backed by gold.  So if the price of gold falls, then people sell Swiss Francs, making the USD/CHF pair go up in the currency exchange market.  In this instance, the Swiss Franc will be worth less.

USD/CAD: The price of the Canadian Dollar is tied to the price of gold because Canada is one of the largest producers of gold.  If the price of gold falls, so will the Canadian Dollar.  So in this instance, the price of gold dropping will cause the USD/CAD pair to rise because of a CAD selloff.

EUR/USD: The Euro is tied to gold also because they are the two things investors pour money into when they see weakness in the US Dollar.  So if the price of gold goes down, then the Euro will also go down.  So as a result, the EUR/USD pairing will go down also (because people are selling their Euros).

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As you can see, gold has a lot of implications on worldwide currencies even if it is no longer a form of mass currency.  Of course, these relationships are all generalizations.  You will find that there may be instances where the currencies don’t act their usual ways.  But that is usually the exception, and not the rule.

And remember, the price of anything on the market is due to supply and demand.  When there is more demand than supply for something, the price of the item rises.  Inversely, when there is more supply than demand for an item, the price drops.  This is the same with currency.