The precious metals market is currently on the decline as the U.S. dollar continues to increase in value. The price of silver has also dropped, and the same will likely continue to occur in other metals in the coming months as markets react to real interest rates and the USD Index rising.
Real rates of interest are negatively correlated with the price of gold. This means that an increase in real interest rates will lead to a reduction in the price of this precious metal. This is because higher rates of interest mean an increase in the opportunity costs of holding assets that don’t bear interest, such as precious metals, which makes these assets less attractive.
If real interest rates continue to increase, it will become expensive for investors to hold precious metals in their portfolio. This will prompt many to sell. and as more gold floods the market, the price of the metal will decline.
The USDX, which is currently in a medium-term rally, is expected to continue rallying, even with the Relative Strength Index currently being above 70. The Relative Strength Index is a useful indicator to investors and gold traders because it helps identify bottoms and tops in the market.
Similar trend sin the dollar’s rally were observed in 2008 and in 2014. Currently, the USD Index is at its next strong resistance at about 103. This does not mean that the Index’s rally will end there because the big rally may continue, even after investors believe that the top has been reached as the USDX corrects.
It is important to keep in mind that consolidation close to this resistance level may not take long or even be significant. In 2014, for example, the USD Index took about a week to consolidate and did so so quickly that it wasn’t easily decipherable. Between December 8 and 16 of that year, the Index moved from 89.55 to 87.84. It is expected that a similar thing will occur this year, with experts noting that as the USD Index corrects, the same could occur in other markets, including stocks.
Experts also note that in 2014, the USD Index corrected after it moved above its previous high of 89.11. The current high is at 104, which means that the USD Index may top at even 105 if the same logic is applied. It may take some time before people digest what’s happening in the market, and by the time everyone recognizes the change, the USD Index may be trading at a significantly higher level.
As this happens, players in the precious metals segment such as Newmont Corporation (NYSE: NEM) (TSX: NGT) can remember that gold has always survived the headwinds that periodically come and go.
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