Will a strong dollar drive investors to commodities other than gold?
Gold loses its shine on the back of US dollar strength, falling below the key $1180 support level. As a strong dollar dampens the appeal of gold, is now the time to consider trading other precious metals?
The inverse relationship between gold and the USD
The price of gold is inversely correlated with the strength of the US dollar. As the dollar strengthens, the demand for gold diminishes and the price falls. By contrast, when the dollar weakens, the price of gold becomes relatively cheaper, the demand for gold rises and supply/demand forces cause the price of gold to rise.
Recently, the price of gold dropped below $1200 per ounce on the back of dollar strength. The Comex division of the NYME (New York Mercantile Exchange) reflected a price of $1195.70 per ounce for August delivery. This price marks a low not seen since the 13 May 2015 price of $1196.70. As the strength of the US dollar increases, downward pressure is exerted on the price of gold.
An indication of just how strong the US dollar is can be seen in the US dollar index which tracks the currency against a basket of currencies including the euro (57.6% weight), the Japanese yen (13.6%), the pound sterling (11.9%), the Canadian dollar (9.1%), the Swedish krona (4.2%) and the Swiss franc (3.6%). The US dollar index has been trading at 95.508 (9 June 2015).
When the US dollar is strong relative to other currencies, it acts in a negative fashion on the price of gold. Since gold becomes more expensive to traders domestically and abroad, the appeal of gold diminishes. More foreign currency will therefore be required to purchase an equivalent amount of gold, thereby making it inherently unattractive.
Higher interest rates give investors pause
Based on the sentiments expressed by Federal Reserve Bank Chairperson, Janet Yellen, there is likely to be an increase in interest rates by September 2015. Provided that the US economy continues growing, a rise in interest rates is on the cards. Part of the reason for the lacklustre economic performance in Q1 2015 was attributed to the effects of a prolonged winter.
With inflation rising domestically, the chips are in place for increases in interest rates later on this year. This will not necessarily bode well for investments in gold or other precious metals since increased borrowing costs act as a damper on investment. Instead, investors are seeking out alternative assets to shore up their financial portfolios. These include new-found interest in the real estate sector, provided that current economic indicators align with this sentiment.
Other precious metals have been enjoying positive performance of late, including copper which rose to $2.7420, silver at $16.02, platinum at $1111 and palladium at $748. The US dollar’s performance has been see-sawing in recent weeks and the latest movement has been a downturn. The crucial $1180 support level has been breached for gold, and the price plunged further to $1162.10 on Friday 5 June 2015.
The US economy is expected to rebound after the poor performance in Q1 2015, given that 280,000 jobs were added in May, ahead of 220,000 expected by analysts. On the precious metals front, it is clear that there is significant pressure to perform especially with yield-bearing assets now starting to show promise.
In China, the quantity of copper arrivals dropped by 16.3 percentage points in May to 360,000 metric tonnes. China’s demand for copper accounts for approximately 40% of worldwide demand.
The main reason for plummeting demand for gold is the strong performance of global bourses from the US to China. A sharp contraction of 5.45 metric tonnes was recorded in gold bullion as of Tuesday 2 June, further highlighting how the precious metal has lost favour in the international arena.
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