How the US Dollar Affected Fluctuations in Gold



Negative impact

The US dollar witnessed ten consecutive days of rises until November 18, 2016. The US Dollar Index (or DXY) closed at 101.2 on the day. November 21, however, saw the price of DXY, which prices the dollar against a basket of six major world currencies, fall. The dollar had soared to a 14-year high on November 18.

As we know, precious metals have been pressured by the massive rise in the US dollar. Fears of rising interest rates offered on Treasuries are surging, pulling precious metals even lower. The Federal Reserve chair, Janet Yellen, mentioned that keeping rates too low could force the central bank’s hand in the future, leading to economic and financial disruptions.

Fluctuations in the dollar are a major determinant of precious metals price changes. The changes in gold and the US dollar are depicted in the chart above. As we can see, they mostly have an inverse relationship. The higher the dollar, the lower the demand for dollar-denominated assets.

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Correlation between the US dollar and gold

The correlation between gold and DXY is -0.36, meaning that about 36% of the time, gold and the dollar move in opposite directions. Silver’s correlation with DXY is -0.32.

These changes based on the dollar can also be seen in mining funds such as the VanEck Vectors Junior Gold Miners ETF (GDXJ) and the Sprott Gold Miners ETF (SGDM). These two funds have seen massive year-to-date rises alongside precious metals. The mining stocks that have rebounded include Alamos Gold (AGI), Buenaventura (BVN), Alacer Gold (ASR), and Harmony Gold (HMY).


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