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The Dollar’s Relationship to Gold in the Week Ended January 12

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Gold hits a four-month high

On January 12, 2018, gold prices hit a four-month high of $1,338.20 per ounce, and it ended the day at $1,333.40. The implied volatility in gold was 8.9%. Call implied volatility figure measures the changes in an asset’s price given the changes in the price of its call option. 

This was the fifth straight weekly gain for gold. Most of these gains were due to the steady decline in the price of the dollar. The US dollar (UUP), tracked by the DXY Currency Index (or DXY) was down 1.0% on January 12. The dollar has a five-day trailing loss of 1.1% and a one-month loss of 3.1%.

The slumping dollar and correlations

As seen in the chart above, the price changes in the US dollar are elemental in the price changes of the precious metals. Gold and the dollar have shown an inverse relationship with each other. Over the past five trading days, gold has increased 1.0% and has a one-month gain of 7.7%.

The correlation between the dollar and gold is ~-48.0%, which suggests that almost 48.0% of the time during the past one-year period, gold moved in the opposite direction of the dollar. So, a rise in the dollar would lead to a fall in gold and vice versa. 

This opposite movement occurs because precious metals are dollar-denominated assets that fall when the dollar increases. The higher dollar leads to reduced demand for dollar-based assets like gold and silver. 

The SPDR Gold Shares ETF (GLD) and the iShares Silver Trust ETF (SLV) have risen 1.3% and 1.8%, respectively, during the past five trading days, resulting from the dollar’s slump.

CFTC data showed that hedge funds and money managers raised their net long positions in COMEX gold and silver during the week ended January 9, 2018.

Among the top mining companies, Barrick Gold (ABX), Goldcorp (GG), New Gold (NGD), and Harmony Gold (HMY) all reported price increases of 3.2%, 3.2%, 5.0%, and 2.8%, respectively.

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