Gold Prices on Downward Slide, but Where Are They Headed? (Part 2 of 13)

(Continued from Part 1)

The US dollar and gold

Gold is traded mainly in US currency, so a weaker dollar makes gold less expensive for other nations to purchase. Also, when the dollar starts to lose value, investors look for a good alternative investment, such as gold, in which to store that value. Gold’s value fluctuates as a result of the strength of the US dollar and the US economy.

Tracking the dollar

Tracked by the U.S. Federal Reserve, the weekly U.S. Dollar Index measures the value of the dollar compared to the currencies of its significant trading partners. A rising index value means the US dollar is stronger than other currencies.

Between March 3 and March 27, 2015, the index value increased from 114.9 to 115.8. Although this isn’t as much of a gain as we saw last month, the US dollar remains quite strong.

The above chart shows the performance of the world’s largest physical-gold-backed ETFs, including the SPDR Gold Trust (GLD) and the PowerShares DB US Dollar Index Bullish Fund (UUP), which tracks the value of the US dollar relative to a basket of world currencies. The six major world currencies in this basket are the euro, the Japanese yen, the British pound, the Canadian dollar, the Swedish krona, and the Swiss franc.

Why is the US dollar rising?

The dollar’s strength can be attributed to falling oil prices and a strengthening US economy, as evidenced by a positive jobs report and consumer confidence. It’s also due to soft growth in other parts of the world, including Japan, China, and Europe.

The expectation of a Fed interest rate hike is also supporting a strong dollar. Rising US interest rates will contrast starkly to loosening monetary policies by the Eurozone and Japan. This contrast is likely to make US-denominated assets more attractive than other currencies and push the US dollar even higher.

A strengthening US dollar usually leads to pressure on gold prices. But there are other factors that impact the US dollar. We’ll look at this later in this series.

A stronger dollar has a fallout impact on gold prices, which in turn affects gold stocks such as Agnico Eagle Mines (AEM), Goldcorp (GG), Newmont Mining (NEM), and Kinross Gold (KGC). AEM, GG, NEM, and KGC make up 4.9%, 7.5%, 5.5%, and 3.1%, respectively, of the Market Vectors Gold Miners ETF (GDX).

Continue to Part 3

Browse this series on Market Realist:

  • Part 1 – Key Indicators Investors Need to Track Gold Prices
  • Part 3 – Track These Manufacturing Indices for Direction of Gold Prices
  • Part 4 – Leading Economic Index Remains in Growth Territory in February