How Gold Is Affected by Dollar Index

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.

Disclaimer: This editorial has been prepared by Walter Pehowich of Dillon Gage Metals. This document is for information and thought-provoking purposes only and does not purport to predict or forecast actual results. It is not, and should not be regarded as investment advice or as a recommendation regarding any particular security, commodity or course of action. Opinions expressed herein are current opinions as of the date appearing in this editorial only and are subject to change without notice and cannot be attributable to Dillon Gage. Reasonable people may disagree about the opinions expressed herein. In the event any of the assumptions used herein do not come to fruition, results are likely to vary substantially. All investments entail risks. There is no guarantee that investment strategies will achieve the desired results under all market conditions and each investor should evaluate its ability to invest for a long term especially during periods of a market downturn. No part of this editorial may be reproduced in any manner, in whole or in part, without the prior written permission of Dillon Gage Metals. This information is provided with the understanding that with respect to the opinions provided herein, that you will make your own independent decision with respect to any course of action in connection herewith and as to whether such course of action is appropriate or proper based on your own judgment, and that you are capable of understanding and assessing the merits of a course of action. You may not rely on the statements contained herein. Dillon Gage Metals shall not have any liability for any damages of any kind whatsoever relating to this editorial. You should consult your advisors with respect to these areas. By posting this editorial, you acknowledge, understand and accept this disclaimer.