How Is the US Dollar Playing on Gold?



US dollar changes

Recently, precious metals have been taking pressure from the US dollar. The dollar’s strength often makes precious metals weaker, as they are dollar-denominated assets. Similarly, the weakness of the dollar gives muscle to gold and other dollar-denominated assets.

With a close-knit relationship, the dollar and gold have a negative correlation, which stands at 0.34 over the past year. A correlation of 0.34 indicates that about 34% of the time, the dollar moves in the opposite direction of gold.

Rising US interest rates would increase the opportunity cost of holding non-yielding physical gold and boost the dollar, which is the basis for gold’s price. The higher the price of the dollar, the lower would be the demand of the dollar-denominated assets.

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DXY index

The US dollar is depicted by the US Dollar Index (or DXY), which measures the dollar’s strength against a trade-weighted basket of six major currencies. The dollar fell by a marginal 0.03% on Wednesday, August 24. However, it has maintained a five-day trailing gain of 0.63%.

Although precious metals fell alongside the dollar on Wednesday, August 24, each metal performed differently on a five-day trailing basis. Gold and silver had five-day trailing losses of 2.1% and 5.9%, respectively.

The changes in precious metals with respect to the US dollar can also be depicted by fluctuations in precious metal–based funds such as the iShares Gold Trust ETF (IAU) and the iShares Silver Trust ETF (SLV).

Among the mining shares that fell on Wednesday were Silver Wheaton (SLW), Yamana Gold (AUY), and Gold Fields (GFI). These three mining shares fell by 8.1%, 10.2%, and 5.7%, respectively. These three companies together constitute ~12.7% of the VanEck Vectors Gold Miners ETF’s (GDX) portfolio.


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