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How the Rising US Dollar Could Affect Gold

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Jan. 4 2016, Updated 11:12 a.m. ET

Precious metals and the dollar

Most precious metals are denominated in the US dollar, so foreign investors that are looking to buy these metals must watch the dollar. Gold, silver, platinum, and palladium had most likely already priced in the raised interests rates that resulted from the December FOMC meeting. The increased interest rates have certainly had a major hand in affecting the precious metals by way of diminishing their appeal, as they do not pay cash flows.

Another important factor that gold investors should take into account in regards to rising interest rates is the strength that the US dollar may experience when the US starts tightening its belt. The below chart explains the long-term relationship between precious metals and the US dollar.

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Miners may be crushed

Gold is the most crucial precious metal. The US dollar may see a boost due to higher interest rates in the US. As a result, investors from all over the world may flock to US Treasury investments that offer higher rates than investors can find elsewhere.

The rising US dollar poses a threat to gold, as buyers will have to use a more expensive dollar to buy one single ounce of gold. Thus, gold may suffer and plunge further in the coming year as interest rates rise.

The fall in precious metals may also plague investments like the iShares Gold Trust (IAU) and the Sprott Gold Miners (SGDM). The US mining-based companies like Royal Gold (RGLD), Hecla Mining (HL), and Newmont Mining (NEM) may suffer from the fall in gold prices and the rise in the US dollar.

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