How Did the US Dollar Act as a Price Launcher for Gold?



DXY Currency Index

As we discussed in this series, Fed Chair Janet Yellen’s testimony to Congress had multiple implications on gold prices. By considering the possibility of negative rates, it helps the zero-yield gold. They also pulled down the US dollar. It’s important to remember the close relationship between dollar-denominated precious metals and the US dollar itself.

Negative rates imply that less money is flowing into the home currency. Investors also prefer higher versus lower yields. The US dollar, represented by the trade-weighted DXY (US Dollar Index) currency, fell 0.34% on February 11. The DXY currency prices the US dollar against a basket of six major world currencies—the Swedish krona, Japanese yen, Canadian dollar, British pound, euro, and Swiss franc.

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Miners and leveraged ETFs shine

The fall in the US dollar usually benefits dollar-denominated assets. The comparatively cheaper currency helps investors pour money into dollar-denominated assets. This helps them rejoice. Gold, silver, platinum, and palladium rose 11.7%, 10.8%, 14.2%, and 6.7%, respectively, on a 30-day trailing basis. The rise in these precious metals is against the fall in the US dollar of ~2.8%

The fall of the US dollar and the rise in precious metal prices also lifted up most mining-based companies like Pan American Silver (PAAS), AngloGold Ashanti (AU), and Franco-Nevada (FNV). These three stocks gained ~46.25, 59.6%, and 20.6%, respectively, on a 30-day trailing basis. Together, these three stocks account for 11% of the price changes in the VanEck Vectors Gold Miners ETF (GDX).

Mining-based leveraged ETFs like the ProShares Ultra Silver (AGQ) and the Direxion Daily Gold Miners ETF (NUGT) rose 26.6% and an unbelievable 174.8%, respectively, on the same basis.


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