How the Dollar Slump Boosted Gold and Other Precious Metals
Much has been said about the fluctuations in precious metals with respect to changes in the US dollar. The dollar has been on a slide over the past few months. The US Dollar Index (or DXY), which prices the dollar against a basket of six major world currencies, has fallen a whopping 4.7% since the beginning of 2017.
A weaker dollar (UUP) often becomes negative for dollar-denominated assets such as gold and silver. The higher the dollar rises, the more expensive it is for investors from other countries to buy dollar-based assets such as gold and silver.
The DXY fell about 0.73% on Wednesday, May 17, alone. It also has a five-day trailing loss of 2.3%. Gold and silver have risen 3.4% and 4.3%, respectively, on a five-day trailing basis.
The DXY scaled a 14-year peak of 103.8 on Wednesday as the Trump trade fear resurfaced. The index rose almost 2.0% against the yen on the same day.
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However, the relationship between gold and the dollar (UUP) may not always persist, and they could move in the same direction instead. Rising global tensions could increase the haven status of gold as well as the dollar. Similarly, a fall in haven demand could draw them lower.
Correlation between gold and the dollar
The correlation between gold and the US dollar has been -0.36% on a year-to-date basis. A negative correlation suggests an inverse relationship. Over the past year, gold fell when the dollar rose about 36.0% of the time.
The SPDR Gold Shares (GLD) and the iShares Silver Trust (SLV) saw substantial gains of 3.2% and 4.2%, respectively, during the past five trading days. The mining stocks that also rose on Wednesday include Silver Wheaton (SLW), Sibanye Gold (SBGL), Barrick Gold (ABX), and Pan American Silver (PAAS).