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To Buy Gold or Sell Gold – Know the Dollar

Buying gold cheaply and selling it expensively requires understanding the U.S. dollar price movements as shown in the USDX index. The USDX almost sets the gold price.

Parts and 2 in this series covered several primary factors driving the price of gold both up and down. Seasonal trends of commodity trading, political decisions, gold bullion or gold coin marketing, plus fundamental supply and demand issues all drive the spot price of gold. Since gold is priced in U.S. dollars, the value of the USD, as shown generally in the USDX or U.S. dollar index, is primary for the recognized value of precious metals and gold specifically.

USDX Influences Gold Prices Inversely

Six currencies including the Euro, Yen, Swiss Franc, British Pound, Canadian Dollar, and the Swedish Krona make up the USDX. Reuters news agency calculates the USDX giving the following weights to each currency according to Forex Ltd U.K.:

  • Euro 57.6%
  • Yen 13.6%
  • Pound 11.9%
  • Canadian Dollar 9.1%
  • Krona 4.2%
  • Swiss Franc 3.6%

The USDX formula is supposed to represent how U.S. trading partners value the dollar. Unfortunately the Chinese Yuan is not included in the formula detracting somewhat from the value of the USDX as an indicator. The U.S. trades over $400 billion of goods and services with China in 2008 representing over 12% of U.S. global trade volume (Source: China-U.S. Trade Issues, Wayne M. Morrison, Congressional Research Service, June 23, 2009).

Since China pegs the Yuan to the dollar within a narrow and rising range, the USDX still works reasonably well in its’ role of predicting trends with the gold price. Generally, when the USDX rises, the gold price falls. As the USDX falls, the gold price usually rises. Think of a see-saw. Gold is on one side, and the value of the USDX sits on the other side.

Proof of the USDX and gold price relationship appears in the accompanying chart below constructed by Zeal Intelligence, LL.C. This chart displays the gold price versus the USDX value from 2001 through 2008. The relationship is strongly inverse, though not perfectly so.

Predicting Gold Prices with the USDX

Importantly, the USDX drives the price of gold rather than the other way around. Gold rising in price follows the USDX dropping in value. The same principle applies when gold falls. The challenge is predicting the value of the USDX.

Trend predicting carries through the same general technical tools from one market to another. Technical analysis of the volume trends, resistance areas, momentum of the price moves and the rate of rises versus falls can strongly move the odds in favor of a profitable USDX trade indicator. Once the trend for the USDX becomes clear, the direction of the gold price follows.

Awareness of the primary 5 factors driving the gold price can provide investors the keys for buying cheap gold and selling expensive gold. Profit follows with the proper timing of the gold coin or gold bullion purchases.

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