USD Draws Back | More Upside For Precious Metals

Will precious metals recover?

Tuesday, August 9, 2016

us dollars

Gold and silver have been some of my favorite financial assets to follow through the first half of the year. The price of these metals has been climbing dramatically for the most part of the year. However, since Friday, we've seen declines as a strong USD put pressure on precious metals. Nonetheless, the USD is starting to draw back, showing that opportunities surrounding precious metals have not faded. Today, we'll talk about why the USD gained on Friday and Monday, what it has to do with precious metals, and what we can expect to see from the prices of gold and silver ahead.

Why The USD Saw Gains In Value

As mentioned above, precious metals have seen some turbulence in the market since Friday, and for good reason. The USD was sent upward by strong economic data. That data was the United States Jobs Report. During the month of July, the United States saw far better growth in jobs than expected.

During the month, it was expected that the United States economy would add between 175,000 and 180,000 jobs. However, during the month of July, the United States added 255,000 jobs to its economy, blowing away expectations.

This was incredibly strong, and much needed news, for the United States economy. Because the value of any currency is heavily dependent on economic conditions in the region represented by the currency, this was great news for the USD as well. After all, any strong economic news is likely to push the value of the currency representative of the region upward.

What Does This have To Do With Precious Metals?

At first glance, it may seem as though currency value fluctuations and economic data have little to do with precious metals. However, that couldn't be further from the case. This news hit precious metals hard and for two very good reasons...

  • Precious Metals Pricing – Precious metals, like most other commodities are priced using the United States dollar. This creates an inverse relationship between the USD and gold and silver. Essentially, when the USD rises in value, the price of precious metals climb around the world. As a result, precious metals become less accessible to the global market, leading to reductions in demand and price. Adversely, when the USD falls, the cost of precious metals around the world declines, making them more accessible, leading to heavier demand. As a result, precious metals grow in price. So, with the strong USD, precious metals took a hit.

  • Economic Conditions – Another big piece here is how precious metals are perceived. By nature, precious metals are considered to be safe haven investments. As a result, these investments tend to perform best when economic and market conditions are negative. This is precisely the reason precious metals have gained so much throughout the year. However, with the strong jobs report, some see a turning point in economic conditions in the United States in the positive direction. As a result, some safe haven demand declined.

What I'm Expecting To See From Precious Metals Ahead

Moving forward, I maintain my overwhelmingly bullish opinion on both gold and silver prices. At the end of the day, the strong economic data out of the United States did cause some headwinds. However, looking around at the global economy, as well as other, more important factors in the US economy, shows that conditions are far from positive. As a result, I'm expecting to see further growth in safe haven demand in the long run, leading to further gains in the prices of gold and silver.

[Image Courtesy of Stock-Free.org]

Joshua Rodriguez

Joshua Rodriguez is an avid financial professional. He is the owner and founder of CNA Finance, a partner at Modest Money, and a writer for US News & World Report, Investing.com, and more! Joshua takes a strong fundamental approach to market analysis and enjoys offering his take on what we can expect moving forward. You can reach Joshua at cnafinancehelp@gmail.com.