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Commodity Corner: Dollar Action Can Influence Gold, Crude Oil

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December 21, 2016
How the Increasing U.S. dollar's influences the commodity market.
svengine/Getty Images

The financial markets have seen significant adjustments since the U.S. presidential election. The big moves haven't just been seen in the stock market in recent weeks; the U.S. dollar has climbed sharply, and that in turn has impacted commodity markets including gold, crude oil and basic materials.

What could these new trends mean for markets in 2017?

Dollar Rises, Commodities Fall?

While it's not a perfect connection, generally speaking, when the U.S. dollar rises, it exerts a negative pressure on commodity prices, namely those that are priced and sold on the world marketplace in U.S. dollars. A rising greenback can make the price of these goods more expensive, which can weigh on demand.

Sam Stovall, chief investment strategist at CRFA notes that:

  • Gold has a -0.6% correlation to the U.S. dollar
  • Crude oil has a -0.3% correlation to the U.S. dollar

Shiny, Yellow and Trending Lower?

As the U.S. dollar has climbed sharply in recent weeks, "gold has gotten decimated—it's down over 10% since the beginning of November," says JJ Kinahan, chief market strategist at TD Ameritrade. The sharp sell-off in gold also reveals a "lack of volatility protection being purchased. We are seeing that not only in gold – but also in the VIX. It makes sense since we've had this amazing rally in stocks," Kinahan says.

Priming the Pump?

Meanwhile the dollar-crude oil correlation remains negative, "but is not as strong as gold," Stovall says. Perhaps complicating the matter was last month’s agreement by OPEC members to cut production in 2017, a move which sent crude prices soaring above $50 a barrel. Looking ahead, Stovall says that "crude oil could be under pressure once again because of continued oversupply globally and the disbelief that OPEC and Russia will stick to their cutback agreements."

Back to Basic (Materials)?

Stovall shines a light on one commodity-related stock sector that may be able to withstand the headwinds of a rising U.S. dollar—basic materials. The materials sector includes industries such as diversified chemicals, construction materials, steel and aluminum.

The materials sector could be a beneficiary from President Trump's initiatives for infrastructure spending, Stovall says. Also, typically this stock sector is a late-cycle performer. "These stocks tend to do well late in the economic cycle. As demand rises, it forces companies to build more plants and equipment," Stovall says.

Ripple-on Effects?

While the rising U.S. dollar could have a ripple effect in commodity-related stocks in 2017, it also could affect revenue potential from U.S. multinational companies, Kinahan says. With earnings season just around the corner—Alcoa kicks off the reporting season on January 10—investors may want to review their current stock holdings. 

Kinahan says: "A rising dollar makes our goods more expensive overseas. If we start to see an economic slowdown overseas, combined with a strong dollar, it could slow demand significantly." Investors can review how much revenue comes from overseas sales via the Company Profile tool in the  thinkorswim® platform from TD Ameritrade. For example, figure 1 shows a profile of General Motors, which, according to the tool, currently gets 47.6% of its revenue coming from China.

Company Profile Tool

FIGURE 1: COMPANY PROFILE TOOL.

To view in the thinkorswim platform, under the Trade tab, type a stock symbol in the box in the upper left, and click “Company Profile” in the upper right hand corner. Image source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

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