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Reading the Reaction of Gold in Terms of the Dollar

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The dollar relationship

If we look at the performances of precious metals in relation to the dollar over the past few weeks, we see a visible inverse relationship. The US dollar (UUP), which is depicted by the US Dollar Index (or DXY), has risen 1.1% over the past five trading days. In that same period, the four precious metals have fallen. The famous gold-based SPDR Gold Shares (GLD) has fallen 2.6% on a five-day trailing basis.

The dollar gained strength after the House and Senate passed their tax reform bills on the belief that tax reform could give a boost to the economy, especially the business sector. The increased probability of an interest rate hike has also boosted the dollar.

Denomination of precious metals

Precious metals are dollar-based assets and thus often react negatively to changes in the dollar. When the dollar rises, investors from other countries find the dollar more expensive than their home currencies, which can lead to a decreased demand for the dollar and dollar-denominated assets.

The above chart shows the performance of gold versus the dollar during the past month. You can see a clear negative relationship between the two.

The DXY rose on Friday, December 8 by 0.11%, and gold fell 0.39%. Mining companies Iamgold (IAG), Alacer Gold (ASR), AngloGold Ashanti (AU), and Newmont Mining (NEM), fell 0.5%, 0.59%, 0.76%, and 1.5%, respectively, on Friday.

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