What's U.S. Dollar vs. Gold ratio telling us?

We got a question on what the U.S. Dollar vs. Gold chart is signaling.

Inverting the price of Gold in U.S. Dollars (XAU/USD) shows the U.S. Dollar vs. Gold ratio (USD/XAU).

USD/XAU has hit record lows, but what does this mean?

This has several important implications:

1. It suggests that investors prefer holding gold over dollars, often due to concerns about inflation, currency debasement, or financial system stress.

2. Since gold is historically viewed as a “store of value,” a weaker USD/Gold ratio indicates declining purchasing power of the dollar.

3. Gold is a "non-yielding asset" and tends to do well when real interest rates (nominal rates minus inflation) are low or negative. If the ratio is at new lows, it may be signaling higher inflation expectations, or that U.S. rates are not keeping pace with inflation.

4. The USD/Gold ratio has hit a record low (Chart 1), which often reflects heightened demand for gold as a safe-haven asset as investors shift away from fiat currencies into tangible assets amid geopolitical stress, recession risk, or financial instability.

5. Historically, sustained downtrends in the USD/Gold ratio have coincided with multi-year commodity bull markets and periods of dollar weakness. We have seen weakness in the U.S. Dollar Index (DXY), which continues to pressure a 14-year uptrend line (Chart 2), and the FTSE/CoreCommodity CRB Total Return Index has trended higher within a bull market since early 2020 (Chart 3).

Chart 1: U.S. Dollar vs. Gold chart (XAU/USD inverted)

Chart 2: U.S. Dollar Index (DXY)

Chart 3: Total return CRB Index (top) and the USD/XAU ratio (bottom)