Two "Outside" Markets Gold Investors Should Watch

There is an old saying among traders: No market trades in a vacuum. Just like economies are interrelated in today's global economy, various markets rise and fall and impact each other.

If you are investing in gold, there are two other markets you could consider keeping an eye on as well. These two markets can offer clues regarding the direction that gold (and other precious metals) are heading and the potential strength of that trend. Here they are:

1. Dollar Index

Many traders like to keep an eye on the U.S. dollar index as a proxy for whether the U.S. currency is strengthening or weakening.

 

The U.S. dollar index is a "basket" of six component currencies,

which includes the euro, the Japanese yen, the British pound, Canadian

dollar, Swedish krona and Swiss franc. The euro takes the biggest chunk

of the U.S. dollar index, accounting for 58%, which does give it some

outsize influence. The yen is the next biggest weight at 14%.

 

The U.S. conducts plenty of trade with both the Euro zone and Japan, which does make this a useful index. There are some currencies left out (Chinese yuan, Mexico peso and Korean won) and the U.S. does do a lot of business with these countries. But, from a trading signal standpoint, traders tend to rely on the U.S. Dollar index when it comes to gold.

Why this matters to gold? The short answer is that gold tends to have an inverse relationship to the U.S. dollar index. The simple reason is that gold is bought and sold on world markets in U.S. dollars. A rising U.S. dollar trend makes gold more expensive to foreign buyers and tends to weigh on demand.

2. Crude Oil

The price of a barrel of crude oil can be important indicator for the gold market as well. The trend in crude oil prices is one factor (but certainly not the whole picture), which impacts the trend of inflation or higher prices.

Energy prices are a major component for inflation with a "trickle-down" impact throughout our economy. If the price of a barrel of crude oil is trending higher, that makes gasoline at the pump more expensive for consumers. But, it goes much farther beyond that. Just think of jet fuel for cargo and delivery (FedEx and UPS), and passenger airplanes and diesel fuel for trucks. Rising crude means higher transportation costs for everything. The food that is trucked across country. The boxes of goods that are delivered to your local Target store via truck. The price of your plane ticket to visit your new grandchild.

Rising transportation costs affect just about every area of the economy and those costs are passed along to consumers in the form of higher prices. Gold is a traditional inflation hedge and rising inflation is a supportive factor to the gold market.

Typical Relationship

Crude Oil Up = Gold Up

Crude Oil Down = Can be a gold-negative or neutral

Not all market relationships are 100% correlated all of the time. Relationships do break down. But, these are two of the general outside markets that can influence the price of gold.

Market Snapshot Now:

  • S. Dollar Index – from its 2017 peak to trough, the U.S. dollar index is down 4.42%
  • Crude Oil – From its 2015 low at $26.05 per barrel, crude oil skyrocketed 112% to its 2017 high at $55.24 per barrel.