Gold prices tumbled on Tuesday, February 14, as the US dollar rose after the US Federal Reserve chair, Janet Yellen, seemed optimistic about raising interest rates. The rise in the dollar initially hampered precious metals, as a stronger dollar can cause dollar-based assets to fall. The dollar index reached its highest in more than three weeks following Yellen’s remarks. The US dollar index, which prices the dollar against a basket of six major world currencies, rose about 0.29% on Tuesday and has bagged almost a 1% increase during the past five trading days.
An increase in the dollar enhances the cost of dollar-based assets for buyers from other countries, and their prices may fall. Similarly, a fall in the dollar makes these assets more expensive, and their prices can rise. The weaker the US dollar gets, the easier it is for investors from other countries to invest in dollar-based assets such as precious metals. Precious metals and the US dollar are inversely correlated.
Correlation between the dollar and gold
The correlation between gold and the US Dollar Index is now -0.43, which means that about 43% of the time, gold and the dollar are moving in opposite directions. Silver’s correlation with the US Dollar Index is also about -0.43.
The uncertainty surrounding the Trump administration has led to a rise of almost 10% for gold since its ten-month lows in December 2016. The funds flowing to gold-based GLD rose on Monday by nearly 0.5% and touched 840.9 tons.
The fluctuations in the precious metals are often replicated by the precious metal mining shares like Kinross Gold (KGC), Harmony Gold (HMY), Alacer Gold (ASR), and Eldorado Gold (EGO). These shares saw a gain of 17%, 12.2%, 23.1%, and 9.4%, respectively.
Source: Market Realist