Why tracking the US dollar is important for gold investors

Update on gold indicators for investors: Brace for more pain (Part 4 of 20)

(Continued from Part 3)

The US dollar and gold

Gold mainly trades in US dollars (or USD). As a result, a weaker USD makes gold cheaper for other nations to purchase. It increases their demand for gold.

Also, when the dollar starts to lose value, investors look for an investment to store value. Gold is a good alternative. Gold will go up and down depending on the strength of the USD and the US economy.

Tracking USD strength

Tracked by the Federal Reserve, the weekly U.S. Dollar Index measures the value of the dollar compared to its significant trading partners. A rising value means the USD is stronger compared to other currencies. Its value increased from 107.93 on November 19 to 111.03 on December 19, a gain of 2.9% in a month. The above chart shows the performance of the world’s largest physical gold-backed ETF, SPDR Gold Shares (GLD) and PowerShares DB US Dollar Bullish Fund (UUP), which tracks the value of the USD relative to a basket of the following six major world currencies: euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc.

Why is USD strengthening?

Weakening major currencies such as the Japanese yen and the euro led to gains in the trade-weighted dollar. Also, positive macroeconomic data such as the improving job market and industrial activity in the United States helped the dollar gain against other major currencies.

The strengthening USD is the main reason why gold prices have been declining. There are other factors that impact the USD. We’ll discuss them later in this series. A stronger dollar has a fallout impact on gold prices, which in turn affects gold stocks such as Goldcorp Inc. (GG), Barrick Gold Corp. (ABX), Newmont Mining Corporation (NEM), Kinross Gold Corporation (KGC), and ETFs such as the Gold Miners Index (GDX).

Continue to Part 5

Browse this series on Market Realist:

  • Part 1 – Gold indicators: An important update for investors
  • Part 2 – How decelerating inflation affects gold prices
  • Part 3 – How is gold connected to the rise in US real interest rates?