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ECB May Loosen Up, Buoying the Dollar and Weighing Down Gold

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Jan. 26 2016, Updated 1:20 p.m. ET

ECB may ease

The European Central Bank (or ECB) at its next policy-setting meeting in March may look at quantitative easing. The Chinese market meltdown and the consequent plaguing of emerging markets have left European nations with no better option than to loosen up the economy by lowering interest rates.

This adversely affected the euro, as lower interest rates curb the appeal of the currency and money flows to currencies that offer higher interest. The US dollar gained comparative strength against the euro, as the United States is possibly looking at tightening the economy.

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The rise in the US dollar weighs down all assets denominated in that currency. An increase in the dollar pressures precious metals, and they may take a plunge. However, during the past week, gold and the US dollar have both risen, most likely due to their haven appeal. The US dollar rose 0.20%, and gold rose 2.5%. The graph below shows gold’s performance alongside the US dollar during recent years.

Miner performance

During the past one week, precious metal-based funds such as the iShares Gold Trust (IAU) and the iShares Silver Trust (SLV) have risen 1.9% and 2.6%, respectively. Mining-based companies, however, saw mixed performances that week. AngloGold Ashanti (AU), Sibanye Gold (SBGL), and Barrick Gold (ABX) rose 12.3%, 12.6%, and 17.3%, respectively. South-African miners AU and SBGL have been on a winning streak, as the rand has successively lost against the US dollar.

These three companies together make up 13.5% of the price changes in the VanEck Vectors Gold Miners ETF (GDX), which has risen 2.6% on a five-day trailing basis.

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