I would like to talk about things that effect the price of gold other than supply and demand issues.
Many times in my comments, I have indicated that the movement in the price of gold was effected by the price movement in the Dollar Index. Let’s look at what the dollar index is and how it effects the price of gold.
“The US Dollar Index is the value of the United States Dollar relative to a basket of foreign currencies often referred to as a basket of US trade partner’ currencies.”
The dollar index is a weighted geometric mean of the dollar’s value relative to the following currencies:
- Euro ( EUR ) 57.6 percent weighted average
- Japanese Yen ( JPY ) 13.6 percent
- Pound Sterling ( GBP ) 11.9 percent
- Canadian Dollar ( CAD ) 9.1 percent
- Swedish Krona ( SEK ) 4.2 percent
- Swiss Franc ( CHF ) 3.6 percent
The movement in the price of the US Dollar index can have a direct impact in the movement of the price of gold. The price of the Dollar Index usually trends in a negative correlation to the price of gold and is part of the Wall Street Trader’s arsenal in determining the future direction of the gold market.
The price of gold is traded in dollar terms around the world, therefore, any movement in the dollar index will likely affect the price of gold. In theory, as the dollar index falls the price of gold raises, and vice versa. I must comment that this negative correlation is “NOT” an exact science as other factors can impact both markets individually.
Because of the many countries included in the Euro Zone, (as compared to the smaller geographical coverage of the other currencies included in the basket), from time to
time I will refer to the activity in the price of the Euro as a direction mover to the price of gold.
There are times in history that one can argue my point, but overall the price of Dollar index should not be ignored and should be used as a tool to determine the future price of the yellow metal.
Have a wonderful Wednesday.
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