The U.S. Dollar, The Euro and Their Influence On Gold Prices
Bob Kirtley: There are many factors that come into play when trying to determine the direction of gold and silver prices that go beyond supply and demand. As we know gold has an inverse relationship with the US Dollar (USD), although there are historical exceptions such as the one we witnessed in the gold bull market of the 80’s, when both were rising at the same time. We may well see both gold and dollar rise in tandem in the future, but for now they are tending to move in opposite directions.
The performance of the USD can be observed when we view it against a basket of currencies as per The US Dollar Index. The US Dollar Index provides us with a value of the USD relative to a basket of foreign currencies. The performances of those currencies within this basket have an effect on the dollar. There are only 6 currencies in this basket and they are weighted as follows:
Euro (EUR), 57.6% weight
Japanese yen (JPY) 13.6% weight
Pound sterling (GBP), 11.9% weight
Canadian dollar (CAD), 9.1% weight
Swedish krona (SEK), 4.2% weight and
Swiss franc (CHF) 3.6% weight
We can see that the Euro is by far the largest component representing 57.6% of this Index and therefore merits being watched closely, so we will take a quick look at it today.
The Euro Chart
We can glean from the chart that the Euro has lost some ground recently, which in turn has had a knock-on effect on the USD. Speculation over a rate cut gained some traction when inflation in the Eurozone dropped 0.7% for October raising the ugly specter of deflation. Should we get more in the way of dovish comments from the ECB then we would expect the euro to continue its decline.