How the Surging US Dollar Has Kept Precious Metals in Its Grip

Gold prices once again retreated on Friday, November 25, by $10.3 to close at $1,179 an ounce. This is the lowest level that gold has seen since February. Meanwhile, silver rose 0.5% to close at $16.5 per ounce. Silver had touched its lowest mark since June during the previous week.

Much of the movements in precious metals over the past month have been determined by the changes in the US dollar. The US dollar Index (DXY) depicts the price of the dollar against the basket of six major world currencies. The DXY has jumped a whopping 2.3% in the past 30 trading days. During that time, gold and silver have fallen 4.3% and 4.5%, respectively.

The chart below depicts how gold and the US dollar have a close inverse relationship. A rise in the dollar often causes a fall in gold, whereas a fall in the dollar can give gold a boost.

This inverse relationship is due to the diminished strength of buyers when the dollar rises, which generally causes demand for gold, which is a dollar-denominated asset, to dip.

Although it paused on Friday, November 25, the dollar has gained amid rising market confidence that the US Federal Reserve will nudge interest rates higher next month, laying the groundwork for even higher rate hikes in 2017. Higher interest rates are a further positive for the US dollar as it means more money flowing into the US, specifically the US dollar.

Changes in the US dollar have also negatively impacted mining funds like the iShares MSCI Global Gold Min (RING) and Global X Silver Miners Fund (SIL). These two funds have risen 61.2% and 90.7%, respectively, on a year-to-date basis, though they’ve both shown 30-day-trailing losses due to the fall in metals.

Mining shares that have also suffered from price fall include Primero Mining (PPP), Agnico Eagle Mines (AEM), Franco-Nevada (FNV), and Randgold Resources (GOLD). These four mining stocks together make up 15.5% of the fluctuations in the VanEck Vectors Gold Miners Fund (GDX).