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Why the Softer US Dollar Isn’t Translating into Gains for Gold

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US dollar is weaker in June

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. In the first 11 days of June, the US dollar fell by 2%.

Up until March, the US dollar had gained close to 26% since its bull run started in July 2014. On March 13, it reached a peak of 100.3. Since then, it started its downward march to a low of 93.1 on May 15. After the decline, its direction isn’t very clear, although it gained most of the time. It gained after a positive labor market report and ISM (Institute for Supply Management) manufacturing index. However, what followed was profit taking. It left the US dollar in negative territory by 2% in June. Soft consumer spending and muted PCE (personal consumption expenditure) inflation also weighed downward on the US dollar.

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US dollar and gold

Dollar-denominated assets, including gold, are influenced by its strength. A strong US dollar is negative for gold and vice versa. Current weakness in the US dollar hasn’t translated into many gains for gold—it was also down by 1.1% in first 11 days of June. There are other factors like labor market strength and strong manufacturing activity that are weighing on gold. However, the relationship between the US dollar and gold is usually restored after a temporary break.

As a result, it’s important to track the direction of the dollar. This can point you towards the direction of gold prices (GLD) and gold stocks’ prices like Aurico Gold (AUQ), Alamos Gold (AGI), and Iamgold (IAG). The US dollar also influences funds like the VanEck Vectors Gold Miners ETF (GDX). Together, these three companies contribute 2.9% towards GDX’s holdings.

China is the largest gold consumer. In the next two parts of this series, we’ll look at the current gold demand in China.

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