FinancialAdvisor's College Class (FACC)

[frenchee]

flota,

Here's some explanation via John Murphy...

GOLD SELLING TIED TO RISING DOLLAR ... Some of you have asked why gold sold off this week in reaction to news of higher inflation. After all, commodities are leading indicators of inflation. Keep in mind that a big part of the commodity advance over the last three years has been tied to a falling dollar. This week, however, the dollar bounced as gold (and the CRB Index) has fallen. The selling in gold is directly tied to a rebound in the dollar. When the dollar rises, gold (and other commodities) correct. Gold is a mirror image of the dollar. The bigger question is why the dollar is rallying. Besides technical considerations, the dollar is also being helped by rising U.S. interest rates. That makes commodities sensitive to rising rates.

RATES AND THE DOLLAR ARE LINKED ... There are a lot of things that determine the direction of the U.S. dollar including the trade deficit and the relative position of competing global interest rates. The direction of U.S. interest rates also plays a role. In other words, the dollar is influenced by the direction of U.S. interest rates. Interest rates usually turn before the dollar does. The recent upside breakout in bond yields makes the dollar more attractive to foreign investors. Rising rates may not be enough to pull the dollar into a major uptrend. But rising rates may be enough to keep it in a trading range for awhile. A firmer dollar makes gold and other commodities prone to profit-taking.