Gold May Get A Boost From The Federal Reserve

Thursday, January 28, 2016

Federal Reserve and Gold

Gold, in my opinion, is the most interesting commodity on the market. That's because there are so many factors that play a role in the demand for the shiny yellow metal. Today, the Federal Reserve may be one of those factors. The Fed recently released details from Wednesday's FOMC meeting, and in my opinion, the details released will likely support growth in the price of gold. Today, we'll talk about what we heard from the Federal Reserve, why it has anything to do with the price of gold, and what we can expect to see from gold as a result.

What We Saw From The Federal Reserve Wednesday

The Federal Reserve meets quite often at what is known as FOMC meetings. The point of these meetings is to discuss the state of the United States economy and what needs to be done with regard to monetary policy. In December, the FOMC meeting ended with a rate hike and comments stating that the Fed is planning on between 2 and 4 more rate hikes throughout the year 2016. So, all eyes were on the FOMC on Wednesday.

As a result of the statements made following the meeting, investors have become a bit concerned, leading to declines in the market (We'll talk about why that's important later). In their statements, the Fed said that economic growth in the United States has slowed a bit since last year. Because of this, analysts are expecting for the Fed to avoid raising its interest rate any time soon.

Why This Is Important For Gold Investors

The Federal Reserve's movements are incredibly important when it comes to investing in gold. There are a couple of reasons for this...

  • Effects On USD – As mentioned above, the Federal Reserve has stated that it intends on increasing its interest rate between 2 and 4 times over the next year. This is incredibly important to keep in mind because when the Fed does increase its interest rate, it also increases demand for the USD. This causes the value of the USD to rise. Because gold is valued using the USD, a high value dollar causes declines. After all, when the USD rises, the cost of gold also rises in nations outside of the United States. This causes decreases in demand and ultimately decreases in the value of gold.
  • Effects On The Market – Another thing to keep in mind here is that anything the Federal Reserve does is likely to have an effect on market conditions. The reality is that the Federal Reserve's statements with regard to the United States economy were incredibly dovish. As a result of the dovish comments, US markets started to slide. After all, when economic conditions are poor, consumers don't purchase as many products or services, leading to declines in corporate revenue.

What We Can Expect To See From Gold Moving Forward

Moving forward, I'm expecting to see relatively bullish activity out of gold, and that activity will likely be fueled by the Federal Reserve. First and foremost, based on the dovish comments made by the Fed, I'm not expecting to see increases in the Federal Funds Rate any time soon. As a result, the value of the USD isn't likely to get much stronger, and may even decline. This is likely to lead to higher demand for gold on an international scale. Also, with the dovish statements made by the Federal Reserve, we're seeing declines in the market. Given the Fed's opinions in conjunction with global economic conditions and the condition of the current oil market, I'm not expecting to see much positivity in the stock market in the near term. As the market declines, investors will look to safe havens as a way to keep their money safe. Since gold is one of the most popular safe havens, this will likely increase demand for the commodity, supporting further price growth. Ultimately, while things don't look positive for the market or condition of the United States economy, it seems as though the value of gold is likely headed upward. 

What Do You Think?

Where do you think the value of gold is headed and why? Let us know your opinion in the comments below!

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.