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Why Gold should hate the appreciating US Dollar

Accendo Markets
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With the US Dollar appreciating against a basket of currencies following the release of positive economic data together with a positive outlook on the future of the US economy, the Fed is expected to increase interest rates in the near future. As the dollar appreciates, the real price of gold should fall accordingly as these are inversely related.

Figure 1. 5-Year historical graph of Gold Spot price per oz.

The price of gold has been on a downward trend since the beginning of 2013, with both its 50-day and 200-day moving averages heading downwards. The 50-day MA has recently crossed below the 200-day MA, a bearish sign that the price of gold is going to continue its downward trend.

Figure 2. 1-Year MACD of Gold

The MACD has just crossed below the signal line, indicating that the price might fall in the near future as all fundamentals are playing against it. Gold is known to be a safe haven commodity, and as there is low political turmoil at the moment demand has fallen due to tensions between Russia and Ukraine having eased. Gold is very expensive to buy and also costly to store, therefore investors that are willing to gain exposure to the shiny asset may well look at cheaper substitutes. Exchange Traded Funds (ETFs) that specialise in buying physical gold, provide investors with very cheap exposure to it with inexpensive fees. These are traded similarly to stocks with their prices being perfectly correlated to the asset itself. Looking at major gold ETF; iShares COMEX Gold Trust ETF (IAU) is an investment fund incorporated in the USA. Its assets consist primarily of gold and give investors inexpensive exposure to the asset without needing to own it physically.

Figure 3. iShares COMEX Gold Trust ETF (IAU) 1-Year historical graph

As the IAU’s assets are mostly held in Gold, its shares are hugely dependent upon the price of physical gold itself and any news that might affect its price. The price of the ETF is also in a downward trend, with the 50, 100 and 200 MA falling from the beginning of the year, it gained some grounds in early November but the MACD recently fell below the signal line indicating when it is likely that the price will fall further.

Figure 4. Newmont Mining Corp. (NEM) 1-Year historical graph

Newmont Mining Corp. acquires, explores and develops mineral properties, it produces gold from operations in many countries including the United States. As the price of gold fell, the company margins were squeezed and its earnings fell accordingly. The company has been in a downward trend since the beginning of 2012. The 50-day MA crossed just below both the 100 and 200-day moving average, indicating further momentum on the downward trend. The company lost almost 29% of its share value when the S&P 500 index gained 6% since the beginning of September. Recently the MACD crossed below the signal line which is also a very bearish sign. As gold prices fall, investor expectations of the company’s performance and earnings should also fall and this should be reflected in the share price falling. Investors should therefore keep a keen eye on the spot price of gold and should make their decisions accordingly, whether it should be by gaining exposure with holding shares In ETFs such as the IAU or by investing in companies that operate in the gold industry such as Newmont Mining Corp.

CFDs, spread betting and FX can result in losses exceeding your initial deposit. They are not suitable for everyone, so please ensure you understand the risks. Seek independent financial advice if necessary. Nothing in this article should be considered a personal recommendation. It does not account for your personal circumstances or appetite for risk.

Ahmad Al Abdali: Introduced to investment at a very young age, he has always been passionate about the online trading industry, he follows it constantly and loves being aware of anything new happening in the macro environment. His area of specialty is technical analysis.

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