Gold Dips Further…Is This The End Of Growth?

Monday, February 22, 2016

Monday was yet another bad day for gold. In fact, it was the second trading session in a row that we've seen declines in the precious metal. So, what's causing the declines and are they likely to continue? Today, I'll do my best to answer this question.

Why Gold Is Falling

When it comes to gold, there are two factors that are happening today that are sending the value of the precious metal downward. Here they are...

  • Oil & Market Growth – The value of oil is seeing sharp increases today. One big story pushing the value of the commodity up is that the United States Energy Information Agency announced that it is expecting to see big declines in U.S. shale oil production. In fact, it expects that throughout the year, US shale production will fall by about 600,000 barrels per day and that in 2017, we will see production decline by 200,000 barrels per day. As a result, oil climbed in value as weakening supply is giving us an answer to the solution for the supply glut. This is also causing the market to climb in a big way today. After all, the energy sector is a big part of the global market as a whole. So, what does this have to do with gold? Well, gold is considered to be a safe haven investment. This means that when market conditions are poor, investors look to gold as a way to keep their money safe. However, with gains in the market today, investors seem to have more of an appetite for risk. As a result, they are pulling money out of gold and putting it back into the market, leading to weakening demand and lower prices.
  • US Dollar – Another big issue for gold today is the United States Dollar. When it comes to gold, and most other commodities for that matter, prices are made using the United States Dollar. That means that when the USD is trading at lows, the cost of gold is less in other nations and that when the USD is trading at highs, the cost of gold is higher in other nations. So, when we see shifts in the value of the USD, we tend to see shifts in the value of gold in the opposite direction. In this particular case, the value of the United States dollar is climbing off of lows at the moment. As a result, gold is becoming more expensive in other countries, which leads to weakening demand.

Is Growth In Gold Over?

This is the million dollar question, and if you search the web, you will quickly see that there are several conflicting opinions with regard to this question. However, in my opinion, the positive movement in the value of gold is far from over. There are two primary reasons for my opinion on this. Here's how I see it...

  • Market & Economy – Because gold is a safe haven investment, the market and economy play a big role in price movements in the commodity. When conditions are poor, we tend to see growth. While the market is surging as a result of gains in oil today, this trend isn't likely to last very long. The reality is that global market and economic conditions remain overwhelmingly poor, and this is likely to further support gains in the value of gold.
  • Supply – Another big factor here is supply. While few seem to be talking about this factor at the moment, it's one that is incredibly important to keep in mind. Earlier in the year, gold reached peak supply. This means that production is likely to continue falling downward and supplies are likely to be squeezed. This will also likely lead to strong movement in the price of gold. 

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.