Why the dollar has outperformed gold in its traditional role as an inflation hedge and recession haven

Even as economic conditions are ideal for the asset to flourish, gold is not performing as well as it could.

During times of economic uncertainty, the precious metal has been used as an inflation hedge.

Despite high inflation and fears of a recession, gold has fallen 15% since hitting a high above $2,000 per ounce in March and is down 5% year to date. Since the beginning of the year, the US dollar index has increased by more than 10%.

OANDA senior market analyst Jeffrey Halley wrote in a recent note to investors that gold hasn't been able to take advantage of the recent dollar weakness.

To say that gold's price action is lackluster is an understatement, and it appears to be facing imminent material downside risks if the technical picture is to be believed.

With inflation running at a 41-year high, gold should be in high demand. Wall Street is worried that the US economy will fall into a recession this year or next. On Thursday, gold fell to a 16-month low.

The dollar is near 20-year highs thanks to the Federal Reserve. The central bank has raised its rates 25 times since March. Analysts think there will be an increase of 75 points or more after Wednesday's meeting.

Gold is negatively correlated with the dollar because the metal doesn't offer a yield.

Demand for safe-have assets jumps during times of fear and uncertainty. The 2008 financial crisis was caused by the correlation between gold and the dollar turning positive.

Another drag on gold is the dollar's dominance in pricing commodities. The dollar's strength puts downward pressure on the gold price.

The outlook for gold isn't good.

While wobbly equity markets and market uncertainty have helped gold earlier this year, rising US real rates have been the main driver weighing on gold prices. As we see inflation leveling off and the Fed tightens its monetary policy, we expect outflows from elevated ETFs holdings to weigh on gold prices.