Gold Continues On The Upward Trend

Monday, April 11, 2016

Gold has been a very interesting commodity to watch as of late. In the beginning of the year, the price of the precious metal went screaming upward as the market crashed. However, in mid-February, the value of the precious metal started to fall as expectations that the Federal Reserve would increase its interest rate hit. Subsequently, the market started to head back up based on bullish expectations in oil. However, the tides are starting to shift once again…and gold is headed back on the upward trend. Today, we'll talk about why gold started to head back upward and how long we can expect to see gains from the precious metal.

What Causes Movement In The Value Of Gold

Before we get into why gold is rising in value at the moment, it's important to understand what causes value movements in gold in the first place. You see, like any other commodity, gold is at the mercy of supply and demand. When supplies are high and demand is low, the value of the precious metal declines. Adversely, when supplies are low and demand is high, the value of the commodity will gain. However, gold isn't like any other commodity. There are a couple of key differences to keep in mind when determining which direction the price of gold is likely headed.

  • Demand From Investors – Gold is considered to be a safe haven investment. As such, when the market or economic conditions become concerning, investors consider precious metals as a way to generate gains from the money they have available. As such, when the market or economic conditions are concerning, we can expect to see gains in demand for gold and ultimately its price.
  • The USD – Gold is priced using the United States Dollar. As a result, when the USD increases in value, gold becomes more expensive in nations outside of the United States, leading to lower global demand and declining prices. However, when the USD declines in value, the precious metal becomes less expensive in nations outside of the United States, leading to increases in demand and ultimately price.

Why Gold Started To Recover

Since December, it was expected that the Federal Reserve would be increasing its interest rate about 4 times in the year 2016. Because currencies no longer run on the gold standard, the value of currencies is largely dependent on the interest rate associated with those currencies. So, when interest is increased, currency values are increased, and when interest is decreased, currency values drop. Considering the idea that the United States Federal Reserve was planning on increasing its interest rate 4 times throughout the year 2016, investors were expecting to see the value of gold decline as the USD climbed. However, recent statements from the Federal Reserve show that these plans aren't going quite as expected. In fact, the Fed has a very dovish opinion with regard to economic conditions and its opportunity to increase rates at the moment. Since rates aren't likely to go up anytime soon, investors are seeing opportunity in gold; sending the price of the metal upward.

Will The Gains Continue?

It is my opinion that 2016 will end as an incredible year for gold. The reality is that all signs are pointing toward growth at the moment. With the Federal Reserve likely delaying interest rate increases, oil heading back downward, and the USD losing steam, everything seems to support price growth in the value of the precious metal. 

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.