How the Fall in the US Dollar Helped Precious Metals



The US dollar and gold

The US dollar has reached higher levels over the past one month. The rising dollar caused much of the retreat in precious metals. The dollar is depicted in the graph below by the US Dollar Index (or DXY), which measures the dollar against a basket of six major world currencies. The DXY slipped due to rising concerns that we’ll see an interest rate hike from the Federal Reserve.

The DXY index, however, slipped on Tuesday by approximately 0.19%, which boosted precious metals. The precious metals are dollar-denominated assets, and their demand may increase with the fall of the dollar.

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 dollar. You can see this inverse relationship between the dollar and gold in the chart above.

Article continues below advertisement

Correlation between the US dollar and gold

The correlation between gold and the DXY is -0.36, meaning that about 36% of the time, gold and the dollar move in the opposite direction. Silver’s correlation with the DXY is -0.32. The weakness in the dollar makes dollar-denominated assets cheaper for buyers that use other currencies.

Precious-metal-based funds such as the Sprott Gold Miners Fund (SGDM) and the iShares MSCI Global Gold Miners ETF (RING) rose 2.7% and 1.8%, respectively, on October 25. The dollar is also an essential contributor to this downward movement. AuRico Gold (AUQ), New Gold (NGD), Silver Wheaton (SLW), and Alamos Gold (AGI) also fell.


More From Market Realist