How Do US Dollar Gains Reduce the Appeal of Precious Metals?



Global unrest slowing

Britain’s new prime minister, Theresa May, replaced David Cameron on Wednesday, July 13. The British pound gained some ground against the other currencies. The Bank of England could cut rates as soon as Thursday, following its monthly policy meeting. On the other side of the world, Japan’s ruling coalition fanned expectations of more fiscal stimulus. The overall improvement of the market sentiment helped the US dollar gain some ground. The US dollar is a crucial currency to consider when analyzing the precious metals, as they are priced in the US dollar.

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The US dollar is surging

The DXY Currency Index, which measures the US dollar, increased 0.12% on Tuesday, July 12. It had a five-day trailing gain of 0.53%. The strength of the US dollar is harmful to assets denominated in the dollar. Investors from other countries need to first buy the dollar to own a dollar-based asset. Therefore, a higher dollar means lower demand for precious metals.

The DXY index (US Dollar Index) measures the dollar’s strength against a trade-weighted basket of six major currencies—the euro, the Japanese yen, the British pound, the Canadian dollar, the Swedish krona, and the Swiss franc. The DXY index traded at 96.4 on Tuesday.

Losses of funds and miners

The Global X Silver Miners ETF (SIL) and the iShares MSCI Global Gold Miners ETF (RING) also lost on Tuesday due to the losses in gold. These two funds fell 3.2% and 3.8%, respectively.

The mining shares that fell the most on Tuesday were Barrick Gold (ABX), First Majestic Silver (AG), and Primero Mining (PPP). These three stocks lost 6.4%, 6.3%, and 5.5%, respectively.


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