Federal Reserve Actions Cause Gold To Glitter Even More

Friday, February 19, 2016

Federal ReserveAhhhh gold, my favorite of all commodities, how you shine so bright... Hmmm, are you starting to glitter more too? Oh yes... the Federal Reserve has polished you very nicely! OK, that may be a little of the top, but the truth is, the Federal Reserve's actions have made gold quite a bit more appealing. Here's how it happened...

Going Back To 2014

2014 was a big year for the Fed. Not only did they put an end to quantitative easing, they made a big announcement that set the stage for 2015. That announcement... The Federal Reserve would be increasing its interest rate by the end of the year 2015. Throughout the year, we saw prediction after prediction. First it was June, then it was August, then October, yet, no interest rate hike happened. Unfortunately, both global and local economic conditions hindered the idea of a rate hike. However, the year wasn't over just yet. In December, the Federal Reserve finally decided to make its move; raising its interest rate by 0.25% to 0.50%.

Yes... I Listened To Talk Radio

Strange title, I know, but bear with me here. Yesterday, I was scrolling through radio stations looking for something to listen to as I worked. While scrolling, I came across a talk radio station that was covering financial topics. That caught my ear, so I decided to listen a bit; and I'm glad I did. Just seconds into listening, the topic moved toward a game. The game had the title, “5 words or less”. The rules of the game were relatively simple. A meaningful question was asked and the contestants had to answer the question in 5 words or less. The question of the day was a very simple, yet very complex one. What is Janet Yellen thinking with regard to the December rate hike?

There were several answers, but the one that really stood out was, “Did I make a mistake?” You see, when the Federal Reserve raised its interest rate, it put tons of downward pressure on the market. From there, all it took was a small piece of bad news and down goes the tickers. Now, the Federal Reserve is very clear about the fact that their job is not to help the market, it's to help the economy. However, the economy means quite a bit to the market.

Think about it this way. When the market is declining, the largest companies in the United States lose money. This means that these companies are less likely to hire, leading to a domino effect of poor economic data. With less jobs, consumers can't spend as much money, they can't buy homes, they can't buy cars, and they can't fuel economic growth.

So, Where Does Gold Come In With All Of This?

Well, gold is highly regarded as a safe haven investment. Safe haven investments are investments that investors flock to when economic and market conditions are poor. As a result, when economic and market conditions are poor, the demand for gold climbs, pushing its value upward. Because the Federal Reserve chose the absolute worst time to increase interest rates, combined with external factors like global economic conditions, the Chinese market, and low oil prices, the market has tanked throughout the year. As a result, investors are running toward gold, which led to one of the biggest spikes that we saw in gold values in years, which happened just about a week ago.

Where Is Gold Headed Moving Forward

Moving forward, I'm expecting to see gold climb in a big way. The reality is that the effects of the Federal Reserve's decision to raise rates are likely to be long lasting. On top of this, we have poor global economic conditions, poor oil prices, and more that will drag the market down and support further growth in gold. To add a straw to the already broken back of the camel, the Federal Reserve plans on increasing its rate at least 2 times this year. This will lead to further turmoil in the market and further growth in gold. So, now is the time to buy!

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.