Could Trump Break the Negative Correlation Between USD and Gold?

Gold price and the strength of the US dollar are inversely correlated. This means that when the US dollar strengthens, gold price declines, and vice versa. This is essentially because gold is mainly traded in USD. So, when the greenback weakens, gold becomes cheaper, attracting investors. This leads to increased demand, which drives up the price of the yellow metal. Gold has also historically been used as a hedge against inflation. Therefore, any decline in the purchasing power of the US dollar prompts investors to move to gold to protect their portfolios. However, both the USD and the XAU are considered safe havens, assets that investors turn to during times of uncertainty.

However, with Trump, an undoubtedly controversial political figure, being elected as the US president, the XAU to USD relationship could change. Here’s how.

Impact of a Second Trump Administration on Gold

In the run-up to the US presidential election, gold saw rising demand due to political uncertainty. This supported the ongoing rally in gold price, which touched an all-time high of $2790.15 five days before the election. When the results of the US election were announced, gold price dropped to $2,559.20 per ounce by November 14, breaking the record rally the precious metal had been witnessing through 2024. However, this decline was short-lived, and gold price rebounded, continuing its upward trajectory. As of December 20, 2024, the XAU/USD was up 26.33% YTD.

The outlook for gold appears bright under the Trump administration, given that the incoming president has promised to raise trade tariffs and cut taxes. These, along with potential deregulation, would support economic growth in the US. Strong economic growth is likely to motivate the Fed to continue with its rate cuts. Lower interest rates reduce the appeal of interest-bearing investments, which means gold could become an attractive asset. The Fed could also be pressured to keep rates low, given that the last time Trump was in office, that’s exactly what he did.

Donald Trump has also promised sweeping tariff reforms. Rising tariffs mean higher costs of raw materials and imported goods. This would lead to an increase in goods prices since businesses tend to pass on higher costs to customers to maintain their profitability. This could spur inflation and lead to uncertainty, which, in turn, could drive investors to safe-haven assets like gold. Lower interest rates might also decrease the attractiveness of the USD. A weaker dollar is usually good for gold demand and, therefore, price.

On the other hand, some policies could prove less beneficial for the precious metal. Trump’s policies have historically been pro-business. This, along with a potential cut in corporate taxes and energy independence through increased drilling, could make the stock market more attractive than gold. However, the important thing to remember is that US policies alone do not impact gold price. The yellow metal’s price is influenced by multiple factors, especially demand for industrial applications and from China and India.

How Will Trump’s Presidency Impact the US Dollar?

The USD rose moderately following the Trump win, with the US dollar index (DXY) up 1.8% by November 6, its highest since early July. This mirrored the greenback’s price action after Donald Trump won the presidential election in 2016. The strengthening of the dollar was primarily driven by expectations of higher economic growth and continued fiscal easing.

A greater impact on the USD could come from the US increasing tariffs on China. A similar move in 2018 led to China allowing the yuan to fall, in an attempt to counter the adverse impact on the competitiveness of its exports. This could put pressure not only on the emerging markets but could also lead to a decline in commodity prices. This would spill back to America, with higher tariffs eventually hurting the dollar. Higher tariffs would restrict the flow of goods and consequently of capital, while reducing dollar use globally, given that most commodities are priced in USD.

Till now, the greenback has remained relatively stable despite the widening budget and trade deficits in the US. This makes US assets and markets attractive, with the US dollar being viewed as a store of value. No other currency comes close in terms of the size and strength of the USD-based financial system.

On the other hand, macroeconomic changes under the Trump administration could lead to a stronger currency in America. He is expected to extend the tax cuts introduced in 2017 beyond 2025, when they are due for expiry. This suggests that the US fiscal policy could see sustained loosening. However, if the increased tariffs lead to inflationary pressures, as mentioned earlier, the Fed could go back to a tighter monetary policy. The combination of monetary tightening and fiscal loosening tends to support a stronger currency.

Since the USD is not overvalued for now, there is room for further strengthening. 

A Changing Relationship

The correlation between gold and the US dollar appears to be changing. This change started even before Trump won the elections. Both XAU and the USD have been on an upward trajectory since 2023. While gold price has been supported by an increase in central bank purchasing, expectations of the Fed cutting interest rates and persistent geopolitical conflicts, the greenback has been supported by the higher interest rates and the strength of the US economy.

We will need to wait and see whether this relationship solidifies into a long-term trend. In the meantime, keeping an eye on economic releases, geopolitical developments and Trump’s policies will be important in making trading decisions.

To Sum Up

• The US dollar and gold have historically been negatively correlated.
• Both XAU and the USD gained after Trump’s victory in the US presidential election.
• Trump’s policies are likely to support gold price, especially if he raises tariffs.
• His pro-business and pro-economy decisions could bolster dollar strength.
• Gold and the greenback have had a strong run since 2023.

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