US Dollar Will Be the Key Factor in This Year’s Gold Trends

By Richard Cox
Richard Cox
Richard Cox
July 20, 2014 Updated: April 23, 2016

It is starting to become clear that a general sense of concern is starting to grip the market, as sentiment gauges head lower and investors appear less willing to increase long exposure in equity markets with prices trading at elevated levels. These declines in bullish sentiment have helped precious metals markets, with correlated assets like the SPDR Gold Trust ETF (GLD) and the iShares Silver Trust ETF (SLV) seeing continued gains for a good part of this month. Of course, assets tied to valuations in precious metals start to become more attractive during times of risk aversion and the inability in seeing a sustainable monthly uptrend in the SPDR S&P 500 Trust ETF (SPY) ultimately means that investors are looking for an alternative store of value in areas other than corporate assets.

Currency Impact

In addition to this, the moves in precious metals are being helped by broad weakness in the US Dollar. The PowerShares DB US Dollar Index Bullish ETF (UUP) continues to trade near its lows for the month and since both gold and silver are priced in Dollars, trends that are positive for one asset class tend to be negative for the other. We have started to see pronounced strength in both the Euro and the British Pound, and the gains made in the Guggenheim CurrencyShares Euro Trust ETF (FXE) and the Guggenheim CurrencyShares British ETF (FXB) suggests that the strength can be found in areas other than in their relative positions to the US Dollar.

Assessing The Trends

“At this stage, the most important questions that traders and investors should be asking themselves is whether or not these trends are truly sustainable,” said Rick Bartlett, markets analyst at CornerTrader . “There are clear concerns that corporate earnings will weaken as a result of the changing stance at the US Federal Reserve but it is not entirely clear that we should be seeing this much weakness in the Dollar, as well.”

Going forward, we would need to see sustained declines in the Dollar in order to maintain some of these broader trends. In 2013, gold markets had one of their worst years in recent memory and there is still a good deal of ground to cover before we can reasonably say that that downtrend has reached its completion. For these reasons, continued weakness in the Dollar would be one of the best things gold bugs could hope for, as this would help support valuations in precious metals and make it much more difficult for selling pressure to drive markets back to new lows for the year.

One potential obstacle here could be seen if investors start to more accurately assess the relative growth performances that have been seen in recent quarters in the US when compared to the economies in the Eurozone and in Great Britain. This is a scenario that would be more supportive for the US Dollar if it started to gain more attention, so this will be a key area to watch in the next few months.

Richard Cox
Richard Cox