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Strengthening US Dollar Is Negative for Gold

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Strong US dollar 

The US Dollar Index measures the US dollar’s strength against a basket of six major currencies. The index was up by 2% in the last five sessions. It ended at 97.02 on May 28.

The US dollar lost 2.3% in the first half of May. However, it started reversing the losses and gained 4.2% since then. The US Dollar Index has been broadly rising since the middle of May. Now, we’ll discuss the major reasons why it has been rising.

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Factors influencing the US dollar

Currently, there are many things influencing the US dollar. Higher-than-expected inflation in April led the US dollar to gain against major currencies. Firmer inflation kept the Fed on the path for a rate hike later this year.

In contrast, there are concerns about Greece defaulting on its payment to the IMF (International Monetary Fund). This is weakening the eueo. In Spain, the win of anti-austerity parties could mean increased political risks later. This also weakened the euro. The euro is trading at close to a one-month low against the US dollar. This led to a flight to safe-haven assets—including gold and Switzerland’s ten-year bonds. The yields dropped into negative territory.

Janet Yellen, the Federal Reserve’s chair, commented on Friday, May 22 that “Delaying action to tighten monetary policy until employment and inflation are already back to our objectives would risk overheating the economy. For this reason, if the economy continues to improve as I expect, I think it will be appropriate at some point this year to take the initial step to raise the federal funds rate target and begin the process of normalizing monetary policy.”

This also caused a rally in the US dollar and a fall in gold prices. The strong US dollar is negative for dollar denominated gold prices (GLD) and gold stocks’ prices like Aurico Gold (AUQ), Alamos Gold (AGI), and Iamgold (IAG). It’s also negative for funds like the VanEck Vectors Gold Miners ETF (GDX). Together, these companies contribute 2.9% toward GDX’s holdings.

China is the largest gold consumer. In the next part of this series, we’ll look the Shanghai Gold Exchange withdrawal data to understand the current gold demand in China.

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