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Inverse Relation: A Softer Dollar Gives a Push to Gold

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Jan. 6 2016, Updated 10:30 a.m. ET

Inverse relation

As investors raised their bets on alternative investments like gold, the US dollar took a fall and touched its two-week low against the basket of major world currencies. The DXY Currency Index is used to measure the US dollar against six major world currencies including the Swedish krona, Canadian dollar, pound sterling, Japanese yen, euro, and Swiss franc. The DXY and gold majorly move opposite to each other as a fall in the price of the US dollar encourages investors from other countries to buy more dollar-denominated assets like gold as well as other precious metals.

The chart above shows the long-term relationship between gold and the DXY index.

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Interest rate hikes

The inverse relationship between gold and the US dollar is evident from the past year’s figures as the US dollar rose almost 9% in 2015 while dollar-denominated gold and silver plunged 10% and 12%, respectively. As the hiking of the interest rates in the United States lifted up demand for the US dollar, the same event weighed on gold and silver prices. Precious metals become less appealing as an alternative investment when Treasury rates are pushed higher.

The rate hike affected not only gold and silver but also ETFs like the leveraged Direxion Daily Gold Miners ETF (NUGT) and the ProShares Ultra Silver (AGQ). The mining companies that have suffered the most in the past year due to the plunging prices of precious metals include Yamana Gold (AUY), Buenaventura Mining (BVN), and IamGold (IAG).

The rising geopolitical tension in the Middle East could build pressure on stock markets worldwide and also the US dollar. The softer Chinese data and turbulence between Saudi Arabia and Iran further took down shares in currencies in Aisa. The US dollar fell to a ten-week low against the yen on Monday, January 4.

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