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How the US Dollar’s Revival Is Playing on Gold and Miners

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Jul. 5 2017, Published 4:18 p.m. ET

DXY strengthens

The fall in precious metals on July 3, 2017, was also due to the rebound in the US dollar. The US Dollar Index (or DXY), which prices the dollar against a basket of six major world currencies, rose 0.62% on July 3.

The last five trading days have been bad for DXY. It’s fallen almost 1.2%. The dollar has been on a downward streak, but it made a U-turn and surged higher on July 3 following the release of healthy US economic data and a pickup in Treasury yields.

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Inverse relationship

The chart above shows gold’s price along with the US dollar as depicted by DXY. We often see a close inverse relationship between the two because gold and other precious metals are all dollar-denominated assets. The higher the dollar gets, the more expensive it becomes for investors from other countries to buy gold.

However, gold and the dollar are sometimes able to walk hand-in-hand. Such a scenario tends to occur during high-risk conditions such as war. The US dollar and gold may both be haven assets during extremely turbulent market situations.

The correlation between gold (IAU) and the US dollar (UUP) is 21.0%, which means that ~21.0% of the time, a rise in the dollar will lead to a fall in gold, and vice versa.

Miners Alamos Gold (AGI), Royal Gold (RGLD), B2Gold (BTG), and AuRico Gold (AUQ) fell 7%, 1%, 4.5%, and 0.35%, respectively, on July 3. The falls of gold and the above-mentioned gold miners were likely driven by the revival in the US dollar.

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