The US dollar has exhibited one of the most impressive trends that the currency market has seen over the last year, as the greenback has risen close to parity relative to the euro on several occasions. Since the dollar maintains its position as the world’s reserve currency, this creates ripple effects in a number of different markets. For investors, this is important because it means not all markets are likely to perform at the same rate into the final months of the year.
When we look at the commodities space, two of the most commonly traded assets are gold and oil. These trends events in the dollar have extended into these areas as well. Both gold and oil commonly trade using the United States currency and this essentially means that these assets have an inversely correlated relationship. Market situations where dollar is rising tend to mean that gold and oil fall, and this rule has held up under the current environment.
But the real keys to understanding the intricacies of the market lie in the ways each asset class performs internally and one way of doing this is to compare the relative performance of both gold and oil.
Chart View: Gold Prices vs. Oil Prices
Source: Alpari Markets
In the chart, we can see the relative performance of gold (shown in dark blue) and oil (shown in light blue) over the last year. As the US dollar has strengthened, both assets have seen declines but here we can see that there is a much more pronounced impact in oil. This is important, and it shows the ways that oil markets can be much more volatile.
For conservative investors, this can mean that it might be less advisable to select portfolio assets directly tied to the value of oil. This is because oil-backed investments can bring greater fluctuations in value over the short term. Having said that, there is an argument that oil markets have fallen too far, too quickly -- and that we are now positioning for what is likely to be a strong rebound. Which way the market goes, well, we will have to wait and see.
Keep in mind that oil is still a valuable world commodity, even with the recent cultural changes that have asked for a shift toward green energy from sustainable resources. Consider this factor whenever we see major price declines like the ones we see now. In all, we are likely to see these trends continue as long as the US dollar is holding its position in the market. Key influences like the Federal Reserve will be a determining factor in whether or not the rest of the market has the incentive to continue with this year’s trends.
Either way, it can hardly be denied that these trends impact the commodities space in ways that are somewhat surprising and more extreme that might otherwise be expected. Currently, the underlying framework is in place for these assets to continue in these directions for the remainder of this year.
Changing Dollar Disproportionately Impacting Commodities is republished with permission from MBM Research