U.S. Dollar Takes Gold ETFs For A Ride

Gold and bullion-related exchange traded funds have exhibited an inverse relationship against the U.S. dollar, but the moves this time around may not be as severe.

Over the past year, the SPDR Gold Shares (GLD) has declined 16.1%, whereas the PowerShares DB U.S. Dollar Index Bullish Fund (UUP) jumped 24.2%.

Gold has shown a history of moving inversely with the USD. In 1971, U.S. President Richard Nixon ended the U.S. dollar to gold conversion, sending the dollar into a free fall and lifting gold prices to a peak of $ 850 per ounce, reports Henry Sanderson for the Financial Times.

In the early 1980s, gold plunged 60% from the $ 850 peak as the dollar index surged 93% above 150. Additionally, in its most recent leg from 2001, gold started its decade-long bull run as the greenback depreciate, reaching a record high $ 1,921 per ounce in September 2011.

The cycle is quickly reversing, with gold bullion prices tumbling and U.S. dollar appreciating. The stronger dollar makes gold more costly for foreign buyers. Moreover, with expectations that the Federal Reserve will hike rates sooner than anticipated, higher rates would diminish gold’s appeal since the metal does not provide a yield. [USD ETFs Pause Their Upward Ascent]

“As long as the US economy remains strong enough to handle those rate hikes and as long as the Fed is going to do it gradually, gold will be under pressure as both the US dollar and rates move up,” Georgette Boele, an analyst at ABN Amro, said in the FT article. “We expect further downside on the gold price this year and next year.”

However, some argue that the current environment will not send gold prices plummeting like previous periods since there are additional supports that could prop up bullion this time around. For instance, China and India, which make up almost two-thirds of global gold jewelry demand, was not there to pick up gold during the 1980s but could buy on the current low prices.

The World Gold Council also projects gold supply to plateau in the coming years as miners and producers have not been able to invest in new projects due to cost pressures – mine production only expanded 2% last year.

Lastly, gold will still act as a safe-haven asset, benefiting from global dislocations due to a strong U.S. dollar and any further geopolitical or global financial risks.

SPDR Gold Shares

For more information on the bullion market, visit our gold category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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