27 Jun

How Gold Reacts to Fluctuations in the US Dollar

WRITTEN BY Meera Shawn

The US dollar

The US dollar is an indicator that closely follows gold’s movements. The US Dollar Index has been in a strong position during the last few months. Over the past three months, the US dollar has risen ~5.8%. Gold has fallen 7.1% during this timeframe.

We often use the DXY Currency Index (or DXY) to price the dollar (UUP) against a basket of six major world currencies. As an alternative to gold, we are using the SPDR Gold Shares ETF (GLD).

As precious metals are dollar-denominated assets, they tend to negatively react to changes in the US dollar. A surge in the dollar is often harmful to precious metals, as an expensive dollar indicates lower demand for it as well as dollar-denominated assets.

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Correlation readings

Much of the US dollar’s movement can also be determined by the movement in US interest rates. Higher interest rates could also support the US dollar and have an adverse impact on precious metals, which aren’t interest-bearing assets.

This year, the correlation between gold and the dollar has been -0.82, indicating that ~82.0% of the time, gold and the dollar have moved in opposite directions. The rest of the time, gold was uncorrelated with the dollar.

Mining companies that were mostly down over the last month due to the strong dollar include Gold Fields (GFI), Randgold Resources (GOLD), Wheaton Precious Metals (SLW), and Franco-Nevada (FNV). These stocks fell 1.1%, 2.4%, 2.1%, and 2.4%, respectively.

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