FOMC Statement Keeps Gold Prices Climbing

Today was a big day for investors across the board. That's because today was the day that the meeting minutes from the July FOMC meeting were released. As a result of the meeting results, gold climbed dramatically. Today, we'll talk about what we heard, why it has anything to do with the price of gold, and what we can expect to see from the precious metal ahead.

FOMC Maintains Current Interest Rates

As mentioned above, the FOMC meeting for the month of July has come to an end, and we have the results. These meetings are incredibly important for gold investors, mainly because these are the meetings at which the interest rate target for the Federal Reserve Bank is set.

During the meeting, the FOMC Committee decided that now was not the right time to increase interest rates. At the moment, inflation is expected to remain low in the near term and the energy sector continues to be a concern. Nonetheless, in the meeting minutes, the FOMC did make it clear that gradual interest rate increases will be coming. In my opinion, the snippet below was the most important statement offered through the meeting minutes...

“Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will strengthen. Inflation is expected to remain low in the near term in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. Near-term risks to the economic outlook have diminished. The Committee continues to closely monitor inflation indicators and global economic and financial developments.

Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at ¼ to ½ percent. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.”

What Does This Have To Do With The Price Of Gold

While it may seem as though the FOMC meeting and the price of gold are two completely different topics, that couldn't be further from the case. The truth is that the value of gold is heavily dependent on the USD. After all, gold is priced using the USD. Therefore, anything that causes movement in the value of the currency will generally cause movement in the price of the commodity. When the USD increases, the cost of gold around the world climbs. This leads to diminishing demand and ultimately lower prices. Adversely, when the USD is weak, the cost of gold around the world declines. This leads to increased demand and increases in the price of gold.

The primary discussion at the FOMC is economic conditions, and more importantly for gold investors, the Federal Funds rate. This rate largely dictates movements in the value of the USD. Therefore, it dictates movements in the price of gold. Because the federal reserve made the decision to keep low rates unchanged, the dollar will likely remain relatively low in value. This will help to continue pushing the value of gold upward.

What We Can Expect To See Moving Forward

Moving forward, I have an overwhelmingly bullish opinion of what we can expect to see from the price of gold. While it's clear that the FOMC is working to look past global economic concerns, those concerns remain. In fact, because of poor global economic conditions, I don't think a rate increase is likely in the year 2016. As concerns continue, we're likely to see further movements toward safe haven investments. This will help to increase the demand for and value of gold throughout the rest of the year.