Dollar and Gold Struggle to Maintain Momentum

April 26, 2010 Updated: October 1, 2015

Precious metal investments, in particular gold, are gaining more ground, but there’s some uncertainty regarding the commodity’s role as a safe haven.

Attributing factors for gold are tied to market events—from the impact of the Greece debt crisis to the Goldman Sachs Group Inc.’s fraud charges by U.S. authorities about its role in shorting subprime mortgage securities.

Gold for June deliveries rose $10.80 to settle at $1,153.70 per ounce on April 23. The ICE Futures U.S. dollar index, a benchmark of the dollar against six main currencies, fell 0.21 percent.

The dollar traditionally has an inverse relationship with gold, so they tend to move in opposite directions. If gold is perceived as a hedge against the dollar, its value decreases when the dollar is strong.

Since the U.S. Securities and Exchange Commission unveiled fraud charges against Goldman, the markets have seen an influx of investments into gold. This reinforces gold prices, which have hovered around $1,000 since early February.

Gold has also been referred to as the "crisis commodity" due its ability to outperform other investments during periods of market volatility. Investors also have a tendency to opt for gold when there is particularly low confidence in government, which may be the pattern that is surfacing in Greece. In October 2009, Greece publicized that its budget deficit would be 13.6 percent of GDP, exceeding previous estimates by at least twofold and surpassing the 3 percent ceiling imposed by the European Union by four times.

However, the position of the greenback could be suggesting a different story. The rise in the dollar has somewhat deteriorated the demand for gold and other currencies that are pegged against the dollar—resulting in them being more expensive to non-U.S. investors. Considering that the position of Greece’s debt burden is becoming more exposed, the dollar could become a preferred investment.

In summary, gold has outperformed the euro as it dropped to a two-week low against the dollar over concerns of Athens potentially going bankrupt.

Wall Street shares rose as investors weighed relatively robust earnings’ results against the uncertainty of the impact of a Greek debt bailout. Also, an unexpected climb of U.S. sales of new homes boosted the strength of the economic rebound, supporting stocks.

“The dollar is so strong that it puts pressure on gold,” said Marty McNeill, a trader at R.F. Lafferty Inc. in New York, in an interview with Bloomberg. “The economy is improving so that gives the Fed more leeway to raise rates later this year.”

The Federal Reserve has controlled the benchmark interest rate at between zero and 0.25 percent since December 2008 to stimulate the economy. Higher rates could push the dollar’s 5.1 percent rally this year and weaken gold, analysts said according to Bloomberg.

“The Fed tightening will continue to obstruct any meaningful rally in gold prices as it sustains U.S. dollar strength into the third quarter this year,” analysts at Deutsche Bank AG said in a report.

The less high profile metals have also been under the spotlight, with U.S. auto sales sustained growth forecasted. Palladium and platinum are used in the manufacturing of catalytic converters for cars and trucks.

In May, silver fell 6.9 cents to settle at $18.009 an ounce on the New York Mercantile Exchange.