Investors have long regarded gold as a good protection against depreciation in a currency's value. The defensive properties apply 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 world's main trading currency, the US dollar.
Research undertaken in 2004 examined the relationship between the gold price and the exchange rate of various currencies against the US dollar from 1971 to June 2002. The resulting data provided firm evidence of gold's effectiveness as a dollar hedge.
The research showed the gold price to be negatively correlated with the US dollar, and to have been consistently so over time and across exchange rates. Analysts established that throughout this period of considerable economic turbulence (1971-2002), gold offered investors consistently strong protection against instability and exchange rate fluctuations.
Concerns remain regarding the fragility of most of the world’s major currencies. Many investors and policy makers are again considering gold’s role as a monetary asset and currency. This attention has supported gold’s multi-year appreciation in price.