US dollar index hits 11-year high: Good for economy, bad for gold

Gold outlook is gloomy as the US economy shines (Part 5 of 21)

(Continued from Part 4)

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 demand for gold. Also, when the dollar starts to lose value, investors look for an investment to maintain value. Gold is a good alternative.

Gold usually goes up and down depending on the strength of the USD and the US economy.

Investors need to keep in mind that there could be a temporary break in the relationship between the USD and gold, as we saw in the beginning of 2015. Due to uncertainty in the Eurozone, investors fled to safe haven assets such as the USD and gold. This led to appreciation in prices for both of them.

Tracking USD strength

Tracked by the Federal Reserve, the weekly US 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. The index value increased from 95.46 on March 2 to 99.68 on March 11, a gain of 4.4%. This steep rise in the USD is the main reason gold has been falling lately.

USD touches 11-year high

The USD is gaining strength against major currencies mainly because of the loose monetary policies being adopted by the European Central Bank (or ECB) and the Bank of Japan. The euro fell below $ 1.1 for the first time since 2003.

The ECB will start buying bonds next week. Such policies have weakened the USD and the euro compared to the trade-weighted dollar. Also, the recent US jobs report was quite positive, which led to a gain in the USD. We’ll discuss the jobs report in detail in the next part of this series.

There are other factors that impact the USD. We’ll look at those later in this series.

Fallout on gold prices

A stronger US dollar has a fallout impact on gold prices. That, in turn, affects gold stocks such as Goldcorp (GG), Barrick Gold (ABX), Newmont Mining (NEM), and Kinross Gold (KGC) as well as ETFs such as the Market Vectors Gold Miners Index (GDX).

Three senior producers, GG, ABX, and NEM, make up 25.2% of GDX’s net assets.

The PowerShares DB US Dollar Index Bullish ETF (UUP) is a good way for investors to gain exposure to the rising USD.

Continue to Part 6

Browse this series on Market Realist:

  • Part 1 – Why tracking gold indicators is important for investors
  • Part 2 – US inflation rate hits negative for the first time since 2009
  • Part 3 – What do US inflation expectations mean?