Gold has long been regarded by investors as a good protection against depreciation in a currency's value, both internally (i.e. against inflation) and externally (against other currencies). In the latter case, gold is widely considered to be a particularly effective hedge against fluctuations in the US dollar, the world's main trading currency.

ENLARGE

While this has been widely believed for many years, it did not, until relatively recently, have formal statistical support. But research in 2004, examining the relationship betwen the gold price and the exchange rate of various currencies against the US dollar from 1971 to June 2002, provided firm evidence of gold's effectiveness as a dollar hedge.

The gold price was found to be negatively correlated with the US dollar and this relationship appeared to be consistent over time and across exchange rates. The research established that despite this period (1971-2002) being one of considerable economic turbulence, gold was, throughout, a consistently good protection against this instability and the exchange rate fluctuations it caused.

Another recent study by the metals consultancy GFMS Ltd. examined the strength of the link between 22 commodities and the US dollar. The results clearly suggested that gold is not only a more potent hedge against the US dollar than other commodities, but also that it provides protection when most needed (when the dollar is losing value), with relatively little loss of upside during a period of dollar appreciation.

Research papers

• Gold as a Hedge against the US Dollar
  by Forrest Capie, Terence C Mills and Geoffrey Wood, 2004
• Commodity Prices and the Influence of the US Dollar
  by Nikos Kavalis, 2006