Because gold is priced in dollars, a weaker dollar mechanically makes gold cheaper for holders of other currencies, and vice versa. That's the textbook explanation for the DXY-gold inverse correlation. In practice it's a loose relationship that holds well some months and breaks down completely in others.
1. Why the correlation isn't constant
DXY only measures the dollar against six currencies, dominated by the euro. It says nothing about real yields, inflation expectations, or safe-haven demand, all of which move gold independently of the dollar. During a genuine risk-off event, both gold and the dollar can rally at the same time because both are being bought as safety, which is exactly when a DXY-based gold trade loses money.
2. A practical filter
Rather than assuming the inverse relationship, check the actual rolling correlation (20 to 30 day) between DXY and XAU/USD before leaning on it. When the correlation is strongly negative (below -0.7), a DXY breakout is a reasonable secondary confirmation for a gold trade. When it's weakened or turned positive, ignore DXY entirely and trade gold on its own structure.
3. What actually moves gold instead
Real yields (nominal Treasury yields minus inflation expectations) track gold more consistently than DXY does over most periods. When real yields fall, gold tends to rise regardless of what the dollar index is doing.