The Fed May Push Gold Higher This Week

Monday, April 25, 2016

The value of gold has been climbing this year…and for good reason. A mix of poor market conditions, poor economic conditions, geopolitical concerns and energy sector declines have sent the value of the precious metal soaring. However, I don't think the gains are over...in fact, I don't think they are anywhere near over. The truth is, that more gains are likely to materialize this week, thanks to the Federal Reserve. Today, we'll talk about what's going on with the Federal Reserve, why it has anything to do with the price of gold, and what we can expect to see from the precious metal moving forward.

What's Going On With The Federal Reserve

This week is a big week for the Federal Reserve. It is the week of the April FOMC meeting. At this meeting, members of the Fed come together to discuss the state of the United States economy, whether or not it needs improvement, and what can be done to improve conditions. However, in this particular case, the topic is mainly going to be about interest rates. After increasing the interest rate for the first time in nearly a decade in December, the Federal Reserve said it would be increasing its interest rate four times throughout the year 2016. However, that doesn't seem to be happening. In fact, there are several reasons that a rate hike isn't likely to happen in the month of April.

  • Inflation Is Still Low – The Federal Reserve has a target on inflation at 2% year over year. At the moment, that number sits at 1% year over year, and if the Fed does increase its interest rate, inflation is likely to fall further.
  • Jobs Could Be Better – While the number of jobs being added to the United States economy is positive, there is room for improvement. For a while now, we've seen poor growth in salaries, and the workforce participation rate continues to fall.
  • Global Economic Conditions – When the Federal Reserve considers a rate hike, it has to think about how that hike may take a toll on global economic conditions. Considering what we're seeing around the world, this is likely to be a hindrance.
  • Market Concerns – While the Fed says it doesn't take market conditions or concerns into account, that's not exactly the case. After all, if the market crashes, the economy will follow. With that said, a higher interest rate could send the market spiraling out of control, and this is likely to stop any hopes of a rate hike at the moment.

What Does This Have To Do With Gold?

While it may seem as though this has absolutely nothing to do with gold, that's not the case at all. The truth is, that gold is valued using the USD. Therefore, when the USD climbs, the price of gold (http://www.gold-eagle.com/rate/price-of-gold/ )  in other nations climbs leading to declines in demand. Adversely, when the USD falls, gold's global price falls, leading to increases in demand. With that said, when the Federal Reserve moves its interest rate, what it's really doing is changing the valuation of the USD. Higher interest rates will lead to higher values and lower interest rates will lead to lower values.  So, if the Fed were to increase its interest rate, the value of the USD would rise, leading to declines on gold. However, in the more likely case that the Fed holds off on a rate hike, the value of gold will climb as the USD falls in value.

What We Can Expect To See Moving Forward

Since the middle of last year, I've been telling my friends and family that it's time to invest in gold. The reality is that the writing is on the walls at this point. Ergo, gold is likely to have an incredible year. So, if you don't own any, it's time to start investing!

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.