A Weaker US Dollar Leads to Gold Price Gains
Market Malleable Metal: What Shapes the Price of Gold?
US dollar sinks to four-month low
Tracked by the Federal Reserve, the weekly US Dollar Index measures the value of the dollar compared to its significant trading partners, which includes six major world currencies:
the euro
the Japanese yen
the British pound
the Canadian dollar
the Swedish krona
the Swiss franc
A rising value means that the dollar is stronger than other currencies and vice versa.
Weak data hurt the dollar
The US dollar fell to a four-month low of 93.1 on May 15, mainly due to weak US economic data. US consumer confidence also fell by the most we’ve seen in over two years, pointing toward less positive prospects for US economic growth ahead. Weak data also deferred the likelihood of a rate hike, which is negative for the US dollar. As well, a narrowing of the spread between US and German bond yields led investors to the euro, further hurting the US dollar.
Rebound
Since May 15, the US dollar has gained 2.3% in two sessions on the expectation that the US economy will rebound. After all, the weak first-quarter data were mostly due to transitory factors.
Improvements in the US economy or the worsening of woes in the Eurozone could work in favor of the US dollar in the coming few weeks.
The US dollar and gold
A stronger dollar makes dollar-denominated gold more expensive for holders of other currencies. It also diminishes gold’s appeal as a hedge. Gold usually goes up and down depending on the strength of the dollar and the US economy.
So, a weaker US dollar is positive for gold prices (GLD) and gold stocks such as Goldcorp (GG), Barrick Gold (ABX), Aurico Gold (AUQ), Alamos Gold (AGI), and B2Gold (BTG). A weaker US dollar is also good for the Market Vectors Gold Miners Index ETF (GDX). Goldcorp and Barrick Gold form 14.3% of GDX’s holdings.
The PowerShares DB US Dollar Index Bullish Fund (UUP) is a good way for investors to get exposure to the rising dollar.
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