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Stronger Dollar, Weaker Gold and Oil

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Dollar-denominated gold and crude oil

The fall in the price of gold on Wednesday, December 30, 2015, may most likely be due to weaker oil prices. This weakness extends to the gold markets as well. Gold has historically been used as a hedge aginst inflation. Inflation, on the other hand, is largely led by oil, as oil contributes a significant chunk to the price basket that calculates inflation.

Crude oil fell a whopping 3.4% on Wednesday, December 30, which caused gold to fall 0.77%. Crude oil and gold closed at $36.60 and $1,059.80, respectively, for the day. Let’s not forget that gold and crude oil are dollar-denominated, and a surge in the US dollar can create more weakness in both of them.

The US dollar index (or DXY) has risen 8.8% in 2015. This has caused dollar-denominated assets to lose their appeal to foreign investors.

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The past week has been depressing for the mining industries. Alacer Gold (ASR), Eldorado Gold (EGO), Centerra Gold (CG), and AuRico Gold (AUQ) fell 4.6%, 3.9%, 9.2%, and 4.5%, respectively, on a five-day trailing basis. The fall in these companies’ share prices has led to a decline in the giant mining-based ETF, the VanEck Vectors Gold Miners ETF (GDX). The above four companies are components of GDX and contribute 7.1% to the price changes in the fund. GDX fell 0.15% during the past five trading days.

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