Dollar Drawdowns Explain Which Way Gold Goes but Not How Far It Runs

Gold and the U.S. dollar tend to pull in opposite directions, and the historical record supports it. Across 334 episodes spanning more than 50 years in which the U.S. Dollar Index fell at least 2% from an intraday high to a subsequent intraday low within 10 trading sessions, gold rose nearly 75% of the time, with a median gain of 1.7%. Gold's response to a 2.2% drawdown in the U.S. Dollar Index was a rise of close to 8%, the direction the record calls for at roughly four times the usual size. The gap between those two things, direction and magnitude, is where the data gets interesting.

David Scutt is a Senior Market Analyst for Global Macro at StoneX Media, based in Australia. He produces technical and fundamental analysis across FX, commodities and equity indices together rather than as separate silos, which is the vantage point a gold and U.S. dollar question sits in.

Key Themes from the Discussion

• 334 U.S. Dollar Index drawdowns over more than 50 years show gold rising nearly 75% of the time.
• Gold's 7.8% gain ranks around the 94th percentile against a median drawdown gain of 1.7%.
• Gold fell in three of four cases where the U.S. Dollar Index rebounded more than 1%.

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Dollar Drawdowns Lift Gold Three Times Out of Four

Gold rose in nearly 75% of the 334 U.S. Dollar Index drawdowns identified over more than 50 years, with a median gain of 1.7%. That hit rate is high enough to be useful and modest enough to be honest, and it stems from mechanics rather than sentiment, since gold is a non-yielding asset priced predominantly in U.S. dollars. Where the recent episode departed from the record was not direction but scale, and Scutt is blunt about the distinction, describing what stood out as "the size of the move over the data set" rather than the move itself. A gain of 7.8% against a typical 1.7% puts the episode around the 94th percentile, which means "the direction fitted history" while the magnitude did not. Specifically, a reader treating the 75% figure as a guide to how far gold travels is reading a direction statistic as a size statistic.

Gold's Path Splits on What the U.S. Dollar Does Next

"History suggests the next move in the dollar may matter far more than the one we've already seen", and the conditional data is where that claim earns its keep. After the U.S. Dollar Index found its low, median gold returns over the following five, 10 and 20 sessions were generally negative, but the aggregate hides a split. Where the U.S. Dollar Index rebounded by more than 1% over the next 20 sessions, gold registered a median decline of 2.1% and finished higher on only a quarter of occasions; where the dollar kept sliding, whether modestly or sharply, gold's median 20 session gain was about 1.7% and it finished higher between two thirds and 69% of the time. The conditional split matters more than the headline percentile reading, because it converts a single dramatic move into a set of outcomes with attached probabilities. "None of this tells us where gold is heading next, but it does give us a useful probabilistic framework", according to Scutt, and the framework is the deliverable, not the forecast.

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--- Written by Gus Farrow, Senior Manager, StoneX Media

--- Expert: David Scutt, Senior Market Analyst for Global Macro, StoneX Media