Following a very prosperous period for the commodities markets, the portfolios of oil and gold investors are now beginning to lose value. Gold bullion has sunk to $745 an ounce, its lowest price in almost a year. Crude oil has also taken a dive, rapidly closing on the $100 per barrel mark. The question looming in the background seems to be: What is causing the sluggishness in these previously high-flying markets?
The answer provided by popular opinion points to the strengthening of the U.S. dollar versus other major currencies, as it rose on Wednesday to an annual high against the Euro. This morning, the dollar continued to look strong among foreign currencies, and not surprisingly, gold fell. The dollar and gold often see opposite trends; gold, which is usually a charming alternative to less stable currency, loses some if its attractiveness when investors are more confident in the dollar.
The explanation for the dip in oil prices is a simpler one. Crude is purchased in U.S. dollars, so it stands to reason that a stronger dollar means weaker oil. It has also been said that mounting pressure from Washington for lower pre-election oil prices is being felt in the sector.
Since its prior bottom against the Euro ($1.6038 on July 15th), the dollar has rallied 12.5 percent, creating a secure feeling for traders of the currency after an elongated period of relative weakness. On this, Bank of New York Mellon Corp.’s senior currency strategist Michael Woolfolk commented, “One of the things we learned today is that the dollar’s safe haven status has returned after taking something of a time out through the last year.”
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