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How Is the US Dollar Affecting Precious Metals?

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The DXY is rising

The US Dollar Index (or DXY) hit nearly a two-week high on Tuesday, October 4, 2016. The index, which measures the greenback against six major currencies, has seen a one-month trailing rise of ~1.4%. Notably, the past week has been exceptionally positive for the dollar. The DXY has risen 0.67% on a five-day trailing basis.

Most of the strength in the index was due to the better-than-expected economic numbers in the United States. The overall economic sentiment also plays on the US dollar. Positive economic news boosts the dollar, while negative news sets it falling.

A weak dollar gives wings to precious metals, and when the dollar strengthens, precious metals rise. The fall in precious metals over the past month has been driven by the Federal Reserve’s interest rate sentiments and the increasing strength of the US dollar.

So the relationship between the US dollar and dollar-denominated precious metals is inverse. The higher the price of the dollar, the lower the demand for dollar-denominated assets.

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The correlation of the US dollar and gold

The correlation between gold and the DXY is -0.36. This means that about 36% of the time, gold moves in the opposite direction of the DXY. Silver’s correlation with the DXY is -0.32.

A weakness in the US dollar is also a boon for dollar-denominated assets, making them cheaper for buyers of other currencies. The rise in the dollar works the opposite way.

Precious metals–based funds such as the SPDR S&P Metals and Mining ETF (XME) and the iShares MSCI Global Gold Miners (RING) have fallen 4.9% and 11.8%, respectively, on a five-day trailing basis. The prices of precious metals have wavered between gains and losses over the past month. Many miners such as AuRico Gold (AUQ), New Gold (NGD), First Majestic Silver (AG), and Goldcorp (GG) have fallen.

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