The Federal Reserve To Toy With Gold Prices

Wednesday, March 16, 2016

Today is the big day! It's the day that the Federal Reserve will announce its decision with regard to interest rates in the United States. All morning, I've been reading about what experts believe is likely to happen, and I have to say, they seem to be split down the middle. There are very valid arguments for the Fed raising its interest rate and very valid argument for keeping things the same. Regardless what happens, we're likely to see big movements in the value of gold. Today, we'll talk about why the Federal Reserve's interest rate has an effect on the price of gold, what would happen if the Fed did raise its rate, what would happen if the rate was left the same, and what I think we're going to see.

Why The Federal Reserve's Interest Rate Is So Important To Gold Investors

Gold, like any other commodity is largely at the mercy of supply and demand. While there are other aspects that make it more difficult to determine where the price of gold is headed, supply and demand is the most pressing factor that has to do with changes in gold's price. Believe it or not, the Federal Reserve's interest rate plays a crucial role in the demand for gold.

The truth is that gold, like most other commodities, is priced using the United States Dollar. This means that when the United States Dollar gains in value, the cost of gold grows in nations outside of the United States, leading to weaker demand and ultimately declining gold prices. Adversely, when the value of the USD declines, the cost of gold lowers in other nations, causing demand to rise and ultimately lending support to gains in the value of the commodity.

The Federal Reserve's interest rate largely dictates the value of the currency. Since the gold standard was abandoned, the primary value in currency is derived from its interest rate. Therefore, when interest rates are low, the values of currencies tend to stay low. However, when interest rates are increased, demand for the currency climbs, leading to increasing value. So, if the Federal Reserve does raise its interest rate, the value of the USD is likely headed upward.

What Would Happen To Gold If The Interest Rate Was Increased

If the Federal Reserve does make the decision to increase its interest rate, what they're really doing is increasing the value of the United States Dollar. In doing so, they would effectively be making gold more expensive in other nations, which will reduce demand and cause declines in the value of the precious metal.

What Would Happen If The Fed Didn't Raise Its Rate

If the Federal Reserve makes the decision to keep interest rates low, the value of the USD will be largely unchanged. So, you wouldn't think that there would be an effect in gold's price, but there will be. Over the past couple of days, we've watched as the price of gold has started to decline. This is the result of investors pushing the value of gold down in anticipation of a rate hike. Therefore, if a rate hike didn't happen, we'd likely see strong growth in the value of gold as the precious metal corrects from lows.

What I Think Will Happen

All in all, I'm not expecting to see a rate hike. While there are valid arguments for the economy doing better in the United States, the Federal Reserve also has to think about how its decisions will affect economic conditions outside of the United States. Ultimately, the global economy would likely hit headwinds if the Fed made the decision to increase its interest rate at the moment, and I don't think they will take the risk. However, it's always a toss up as the Fed has made poor decisions in the past!

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.