US Dollar Rally Crushes The Commodities

US Dollar is getting strong. The best trade for the last 2 months has been to go long on US Dollar against other currencies. EUR/USD and GBP/USD are in strong downtrends just because of the US Dollar getting strong. The dollar rally certainly hasn’t been celebrated by commodity bulls, who saw gold hit a 2½-month low on Tuesday, and crude plunge by more than 3 percent. Broadly speaking, commodities tend to move inversely to the dollar. This makes sense, given that as each dollar becomes worth more, it should take fewer of them to buy the same amount of hard assets. Most commodities are priced in U.S. dollars.

US Dollar is the antithesis of gold. When US Dollar gets strong, gold gets weak. Statistically speaking gold and US Dollar are negatively correlated. It is during the times of political and financial uncertainty that investors flock towards gold as a safe haven. When Federal Reserve Bank increases the interest rate, this makes US Dollar strong and gold weak. High interest rates are considered good for the currency. Investors start investing in a currency that offers high interest rates. When you hold gold, you don’t paid any interest. So when the Federal Reserve Bank increases interest rate, gold loses value. On the other hand, high inflation makes the currency weak and gold strong. In US inflation is not a problem. So we should expect the gold price to stay close to $1,000 per ounce. Did you read the post on how to predict gold price using kernel ridge regression? Watch the video below that explains the relationship between gold and US Dollar!

Price of crude oil is determined by market supply/demand. When lot of crude oil is pumped from the wells, it floods the market and price of crude oil falls in the global market. On the other hand when crude oil is pumped less, supply becomes less than demand. This increases the price of crude oil. Price of crude oil is simple economics.

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