US dollar moves sideways
Tracked by the Federal Reserve, the weekly U.S. Dollar Index measures the value of the dollar compared to its significant trading partners. A rising value means that the dollar is stronger compared to other currencies and vice versa. The index value gained a total of 1% in three consecutive sessions on May 7, 8, and 11. In May, on a net basis, the dollar index has been almost flat.
The consensus of strong labor data boosted the US dollar against the basket of currencies. The U.S. Department of Labor released the non-farm payrolls report on Friday, May 8. The claims for jobless benefits and increased job additions in April lent some support to the US dollar.
The US dollar and gold
Gold mainly trades in the US dollar. As a result, a weaker dollar makes gold cheaper for other nations to purchase and it increases the demand for gold. Also, when the dollar starts to lose value, investors look for an investment to maintain value. Gold is a good alternative.
Gold usually goes up and down depending on the strength of the dollar and the US economy. There are other factors that impact the dollar. We’ll look at those later in this series.
Fallout on gold prices
A stronger US dollar has a fallout impact on gold prices (GLD). In turn, it affects gold stocks like Goldcorp (GG), Barrick Gold (ABX), Aurico Gold (AUQ), Alamos Gold (AGI), and B2Gold (BTG). It also affects ETFs like the VanEck Vectors Gold Miners Index ETF (GDX). Goldcorp and Barrick Gold form 14.3% of GDX’s holdings.
In contrast, the PowerShares DB U.S. Dollar Index Bullish ETF (UUP) is a good way for investors to gain exposure to the rising dollar.
In April, the U.S. Dollar Index fell by 4%, while crude oil prices rose by 15%. Gold prices have still been trading in a very tight range of $1,180–$1,205 per ounce. There’s one factor that could partly explain gold’s weakness despite other supporting factors. We’ll discuss the factor in the next part of this series.