Why does the dollar move inversely to gold?
Currently, the dollar is the only international currency with nothing besides gold to challenge it. Besides being a commodity, gold is a universally accepted form of money. All central banks around the globe hold gold as part of their foreign reserve besides foreign exchange and statutory drawing rights. As on December, 2003, the US holds almost 58.2 per cent of its reserves in gold. And it is the highest in the world followed by France at 55 per cent and Germany at about 45 per cent. The US dollar has flagged in recent months despite fairly robust US economic data due to fears of a widening account deficit and low interest rates. Most of the countries have invested substantially in the US treasury markets. The danger for the US treasury is that institutional investors such as the central banks of Japan, China and others are becoming disenchanted with their low yields and declining prices in their dollar-denominated holdings. This is going to push them towards hard assets such as gold.
