Why Are Precious Metals Impacted by Changes in the US Dollar?



Slow surge for gold

Gold futures traded marginally higher on Monday, May 16, 2016. Gold reclaimed its lost strength compared to last week. Gold gained for three straight trading days. Thursday, Friday, and Monday brought benefits. However, gold was only 0.24% higher. It closed at $1,274.2 per ounce on Monday. The call implied volatility in gold. It measures the changes in the call price with respect to changes in the asset price. It’s at 15.8%. The marginal rise in precious metals during the past few days was due to the relative gains in the US dollar.

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The US Dollar Index, denoted by the DXY Currency Index, fell 0.18% on Monday, May 16. It accumulated losses close to 0.31% on a 30-day trailing basis. The DXY Currency Index measures the dollar’s strength against a trade-weighted basket of six major currencies—the euro, yen, pound, Canadian dollar, krona, and franc.

US dollar and gold

The US dollar and gold prices are linked. You can see this in the above chart. The almost perfect inverse relationship is visible since the beginning of April. However, for the last few trading days, the relationship seems to be loosely held.

The stronger the US dollar, the cheaper the precious metal gets for investors in other currencies. This reduces the demand. The fluctuations in the precious metal with respect to the US dollar also bring about changes in funds like the iShares Gold Trust (IAU) and the leveraged Direxion Daily Gold Miners Fund (NUGT). These two funds have increased 20.2% and 338.6%, respectively, year-to-date.

The mining shares that saw the biggest gains on Monday include Primero Mining (PPP), Randgold Resources (GOLD), and Harmony Gold (HMY). These three shares saw a rise of 9.2%, 3%, and 3.6%, respectively. Together the three companies account for ~7% of the price changes in the VanEck Vectors Gold Miners Fund (GDX).


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