An important factor besides the rate hike phenomenon that’s played on precious metals has been the US dollar. The dollar has been strong over the past month, resulting in gold’s treading water. Other precious metals suffered due to the rise in the dollar. The fall in the dollar gave some buoyancy to greenback-denominated gold.
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Most of the volatility in precious metals in December was driven by fluctuations in the US dollar. The US Dollar Index (or DXY), which measures the greenback against a basket of major world currencies, touched 103.6 on December 20, its highest level since December 2002.
Movements in gold and the US dollar are shown in the graph above. As you can see, they mostly have an inverse relationship.
The United States may not face hyperinflation anytime soon, as the dollar continues to surge on Donald Trump’s proposals for lower taxes and increased expenditure. This could boost the US economy and, therefore, the US dollar.
The correlation between gold and DXY is -0.36, which means that about 36.0% of the time, gold and the dollar move in opposite directions. Silver’s correlation with DXY is -0.32.
Changes due to the dollar’s movements can be seen in mining funds such as the iShares Gold Trust ETF (IAU) and the iShares Silver Trust ETF (SLV). These two funds have seen massive year-to-date rises alongside precious metals, but they’ve fallen in the past month.
The rising dollar could also negatively affect mining stocks. Some mining stocks that have fallen recently due to the falls in precious metals include Royal Gold (RGLD), B2Gold (BTG), Alamos Gold (AGI), and New Gold (NGD).