From Justin Dove, Editor, The Crux:
The U.S. Dollar Index just reached a new 52-week low… and that’s good news for gold.
As DailyWealth Trader editor Ben Morris explained in a recent post, the movement in the U.S. Dollar Index has a big effect on the price of gold. It’s all thanks to a concept he calls “two sides to every price.” Here’s what it means…
When most folks think about the price of something, they simply think about its cost in their home currency. A book costs $10… or a bottle of wine costs $30. In day-to-day life, that line of thinking is fine. But it’s only one side of the story.
When you’re looking at investments, it’s useful to look at both sides…
On one side of a price, you have the product, service, or asset being measured. That’s the book… the bottle of wine… the ounce of gold. On the other side, you have your “measuring unit.” This is the currency you’re measuring the first side with… like dollars, euros, or Japanese yen.
To understand what’s really happening when prices move, you need to understand what’s happening on both sides. Either the product, service, or asset has changed in value… or the measuring unit has.
When the dollar falls, the number of dollars it takes to buy an ounce of gold rises. Gold may not change in euros or yen. But folks in the U.S. will see the price of gold rise.
Of course, there are other factors that affect the price of gold. But most of the time, when the dollar rises or falls, gold does the opposite.
You can see this relationship clearly in the 15-month chart below. Just look at how peaks in the dollar line up with valleys in gold… and how valleys in the dollar line up with peaks in gold.
The easiest way to measure the value of the dollar at any given time is through the U.S. Dollar Index. This index tracks the value of the dollar versus a handful of major currencies, including the Japanese yen and the euro.
As you can see in the chart below, the dollar index soared nearly 25% in 2014. But after moving sideways for most of 2015, the index just broke down to its lowest level in more than a year. This means a new downtrend in the dollar may have started… and lower values are likely.
The lower the dollar index goes from here, the higher gold (and gold stock) prices should rise.