Gold Is Falling: Are Investors Forgetting About Supply?

Friday, May 27, 2016

Gold had an incredibly strong start to 2016. As global stocks started to tumble and economic and currency concerns became apparent, the value of the precious metal skyrocketed. However, things seem to be changing. At the moment, and for the past several trading sessions, the price of the commodity has been declining. While the declines are understandable, I believe that investors are forgetting one key piece of data - supply! Today, we'll talk about why gold is falling, what's going on with supply, and what we can expect to see from the price of the precious metal throughout the rest of the year.

Why Gold Is Falling In Value

The fact that gold is declining is no surprise. The reality is that the precious metal is heavily dependent on movements in the USD. When the USD is strong, the value of gold falls, as the precious metal becomes more expensive in nations outside of the United States. When the USD is weak, the value of gold tends to climb, as gold becomes less expensive around the world, leading to strong demand.

Recently data was released with regard to inflation in the United States. All in all, the data was overwhelmingly positive. In the month of April, the United States saw incredibly strong inflation. In fact, consumer prices rose more in the month than they have in any other month over the past 3 years. This solid data sent the USD upward. On top of the fact that the data was strong, it also lends a hand to the Federal Reserve's plans to increase its interest rate. When this happens, likely in June, the value of the USD will likely climb even higher! Ultimately, this is putting quite a bit of resistance on the price of gold.

Are Investors Forgetting About Supply?

Like any other commodity, gold's price is determined by the supply and demand surrounding the precious metal. When supplies are high and demand is low, we tend to see declines. However, when supplies are low and demand is high, gains are generally the result. Early this year, investors received some incredibly important news with regard to supply.

On January 17th, it was announced that gold had reached peak supply. Essentially, this means that production of the precious metal is expected to start declining. In fact, in 2016, experts are expecting that the world's largest gold producers will produce about 3% less of the precious metal than they had produced previously. The declines in production are likely to last for years to come. As the law of supply and demand dictates, this should lead to gains in the value of the precious metal.

What We Can Expect To See Moving Forward

I have a relatively mixed opinion of what we can expect to see concerning the price of gold. In the short term, more declines are likely, as investors continue to worry about what an interest rate hike from the Federal Reserve will do to the USD. However, I don't believe that this will be the be-all and end-all for the precious metal this year. In fact, in the long run, I'm expecting to see further gains. First and foremost, the reaction we're seeing to the strong economic data is a gross overreaction to the news, and to the idea of the Fed increasing its interest rate. The truth is, the rate isn't likely to increase by much, nor is it likely to have such a negative effect on the precious metal. Moreover, considering the news with regard to supply, it only makes sense that we will likely see further gains in the value of the yellow 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.

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