Commodities, including gold, are denominated in dollars, meaning that as the greenback strengthens, commodities often do the opposite. The inverse relationship between gold and the dollar has recently been on display.
Over the past three months, the Invesco DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP) is up 6.4% while the SPDR Gold Shares (NYSEArca: GLD), the world’s largest gold ETF, is lower by 5.7%. UUP tracks movements against a basket of currencies including euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. UUP tracks the Deutsche Bank Long USD Currency Portfolio Index – Excess Return Index.
The strengthening U.S. economy is translating to a stronger dollar, which is often a problem for gold. Gold, like other commodities, is denominated in dollars, meaning it has an inverse relationship to the U.S. currency.
“Much maligned gold is set to stage a comeback as the dollar weakens, according to Pictet Wealth Management,” reports Bloomberg. “Bullion will climb to $1,320 an ounce by the end of the year, said currency strategist Luc Luyet, which compares with about $1,256 on Wednesday. While trade tensions haven’t yet provided much support, an escalation combined with a slide in the dollar could lift prices, Geneva-based Luyet said on Monday.”
Related – Bitcoin Price Prediction: $5,350 in Bear Market
More Support for Gold
Other market observes are bullish on gold with some forecasting $1,400 per ounce for the yellow metal next year, assuming the dollar weakens as other global central banks reveal tighter monetary policies.
“Other analysts have also been supportive of the metal. Suki Cooper, precious metals analyst at Standard Chartered Plc, sees gold testing five-year highs by the end of the year, implying that prices could rise toward $1,400, while Bart Melek, global head of commodity strategy at TD Securities in Toronto, has said that he expects the metal to start to rebound in the final quarter,” according to Bloomberg.
GLD is the largest physically backed gold ETF on the market, providing investors exposure to gold price movement in an easy-to-use investment vehicle. The ETF is backed by physical gold bars stored in London vaults. The gold trust currently holds about 27.2 million ounces of gold, so each SDPR Gold Shares represents fractional ownership of the underlying gold.
“In the nearer term, jewelry demand tends to be relatively strong between August and January because of festivals in India and China, and that should be supportive, or at least limit the downside, said Luyet, who has six years of experience in currencies and precious metals,” reports Bloomberg.
For more information on the gold market, visit our gold category.
Tom Lydon’s clients own shares of GLD.