The US Dollar Is Overpowering Gold as Hedge against Market Risk


Jul. 2 2018, Updated 10:24 a.m. ET

US dollar and gold

Among growing market unrest, investors have turned to the US dollar rather than gold as a safe haven. The US Dollar Index, which prices the dollar against a basket of six major world currencies, is at 95.5. It has increased 3% YTD (year-to-date). Since precious metals are all dollar-denominated assets, they decline with the revival of the US dollar.

Investors from other countries do not invest as much in dollar-denominated assets as they used to since the US dollar is getting expensive.

[marketrealist-chart id=2791407]

We often use the US Dollar Index (or DXY) to price the dollar (UUP) against a basket of six major world currencies. As an alternative to gold, we’re using the iShares Gold Trust (IAU). As an alternative to silver, we’re using the iShares Silver Trust (SLV).

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Correlation readings

The changes in US interest rates can also determine much of the US dollar’s movement. Higher interest rates could also provide support for 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% 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 rose on Friday include Alamos Gold (AGI), Royal Gold (RGLD), Goldcorp (GG), and Pretium Resources (PVG), which rose 2%, 1.6%, 3.2%, and 2.5%, respectively.


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