Do Current Market Conditions Support Growth In Precious Metals?

Monday, May 30, 2016

gold and silver bullion

Precious metals are very interesting commodities. While they are often used in jewelry, artwork, and far more, they are also considered to be a safe-haven investment. Therefore, when market conditions are negative, investors tend to flock toward precious metals as a way to keep their money safe. When market conditions are positive, the commodities tends to decline, as prudent investors become less interested in safe havens. With that said, what are market conditions telling us? Do they support growth in the value of precious metals? Today, we'll talk about whether or not market conditions will promote growth in the price of precious metals.

This Year Hasn't Been A Strong One For The Stock Market

This year has been an incredibly interesting year for the stock market. Early on in the year, global markets took a dive, following China's lead. As the world's second-largest economy struggled, its market fell dramatically. This caused fear among investors around the world, sending the global markets on a downward spiral. As a result, precious metals climbed in value as safe-haven investors clamored, looking for a way to hold the intrinsic value in their money.

In February however, market conditions started to turn positive once again. Oil finally started to pick up steam, which helped the energy sector as a whole. This caused the energy sector to climb, dragging the rest of the market up the hill with it, and allowing major global indices to start seeing gains once again. While we have seen bad days in the market since then, for the most part, the overall trend has been upward, leading to declines in the values of precious metals.

Will Market Conditions Continue Down The Positive Path?

For a few months, at this point, we've been seeing gains, overall, in the market. However, it doesn't seem as though either technical or fundamental data support much further growth in the general markets. Here's how I see it...

There's One Big Fundamental Issue

While global markets are riding on highs at the moment, there's one fundamental issue that suggests that the gains are likely to reverse relatively soon. This is all centered around the United States Federal Reserve. For some time now, the Fed has been planning on increasing its interest rate. However, poor economic conditions in the United States and around the world have hindered the central bank's ability to do so. Nonetheless, recent data with regard to inflation in the United States will likely prove to be just what the Fed needs in order to increase its rate. This is bad news for the stock market. First off, a higher interest rate will increase the value of the USD, making US products and services more expensive in other nations. Not to mention, consumers will be forced to pay more in interest, leading to less consumer spending. On top of that, home sales will likely decline as low mortgage rates won't be available anymore. All of this combined is likely to weigh heavily on the general market as it causes pain for corporations.

Things Don't Look Much Better For The Market From A Technical Standpoint

As you can see from the Dow Jones Industrial Average chart above, the index has been trading cleanly between support and resistance for the past year. Believe it or not, this is what we've seen from most global indices. However, looking at the chart above, one thing becomes clear almost immediately; the market is reaching a big resistance point. Given current fundamental data, it doesn't seem as though we are going to see a breakout past resistance. As a result, from a technical standpoint, it looks like, we're headed for more trouble in the market and fast!

What This Means For Precious Metals

While precious metals are declining at the moment, I don't see declines lasting very long at all. As mentioned above, these commodities are considered to be safe-haven investments. As such, when stock market conditions aren't positive, we tend to see declines. In this particular case, while market conditions are strong at the moment, both fundamental and technical data support declines soon to come. As a result, I'm expecting safe-haven demand to rise and the price of precious metals to follow. 

Joshua Rodriguez

Joshua Rodriguez is an avid financial professional. He is the owner and founder of CNA Finance, a partner at Modest Money, and a writer for US News & World Report, Investing.com, and more! Joshua takes a strong fundamental approach to market analysis and enjoys offering his take on what we can expect moving forward. You can reach Joshua at cnafinancehelp@gmail.com.

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