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How Does Strength in the US Dollar Play on Gold?

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DXY and gold

One of the primary reasons behind the fall in precious metals on Monday, May 9, 2016, is the stabilization of the US dollar. The US Dollar Index (or DXY) measures the dollar’s strength against a trade-weighted basket of six major currencies: euro, yen, pound, Canadian dollar, krona, and franc. The US dollar retreated during the past one month.

DXY has fallen almost 4.5% year-to-date. However, the index has risen 1.4% during the past five trading days. On Monday, May 9, DXY added 0.09% to its previous day’s close and ended the day at 94.2.

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The US dollar and gold, or for that matter all precious metals, have a close-knit relationship. The strength of the US dollar weighs down dollar-denominated assets such as gold and silver. That’s because investors in other currencies have to buy an expensive dollar against their home currency to invest in precious metals.

The short-term comparative performances of gold and silver are shown in the graph below.

The impact on funds and miners

Gold and DXY have a close inverse relationship and are usually expected to react in opposite directions. The US dollar has shown strength against the Japanese yen, although the dollar is recovering from a notable fall against the yen in the past week. Funds and miners that also fell due to the strength of the US dollar include the SPDR S&P Metals and Mining ETF (XME) and the Sprott Gold Miners ETF (SGDM). These funds fell 7.8% and 5.8%, respectively, on Monday.

Mining shares that fell include Kinross Gold (KGC), Hecla Mining (HL), and Iamgold (IAG).

In the next part, we’ll see how the stock recovery has impacted precious metals.

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