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How Strongly Is the US Dollar Playing on Gold?

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Dollar rebounded

One of the main reasons behind the fall in precious metals on Wednesday, May 18, 2016, is the stabilization of the US dollar. The US Dollar Index (DXY) measures the dollar’s strength against a trade-weighted basket of six major currencies—the euro, yen, pound, Canadian dollar, Swedish krona, and franc. The US dollar retreated during the past month.

The US Dollar Index has fallen almost 3.5% year-to-date. However, the index has risen 1.1% during the past five trading days. On Wednesday, May 18, the US Dollar Index added 0.11% to its previous day’s close. It ended the day at 95.1.

The US dollar and precious metals have a close-knit relationship. The strength of the US dollar weighs down dollar-denominated assets such as gold and silver. 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 following graph.

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Gold and the US Dollar Index

Gold and the US Dollar Index have a close inverse relationship. Usually, they’re expected to react in opposite directions. The US dollar strengthened against the Japanese yen. However, 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 Gold Shares (GLD) and the iShares Silver Trust (SLV). These funds fell 1.7% and 2.5%, respectively, on Wednesday.

Mining shares that fell include Royal Gold (RGLD), GoldCorp (GG), and First Majestic Silver (AG). These three companies fell 5.7%, 7.7%, and 7.4%, respectively. Together, they account for 12.7% of the price changes in the VanEck Gold Miners Fund (GDX).

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