Gold Price Continues Downward…What's Ahead?

Wednesday, August 24, 2016

gold price

Gold has been one of my favorite commodities to watch throughout the year, and for good reason. The price of the precious metal has skyrocketed. However, more recently, we've been seeing declines. So, what's causing the declines…and will they last?

What's Causing The Value Of Gold To Sink?

To understand why gold is falling in value, it's important that you understand what has led to the upward movement throughout the most part of this year. In the beginning of the year, a Chinese market crash and concerns with regard to the Chinese economy pumped the price of the precious metal upward. This was followed by more economic concerns out of Japan, Europe, and the UK, all of which sent safe haven investors toward gold. This lifted demand and caused the price of gold to climb.

Another important factor here has been the Federal Reserve's interest rate. Because this rate largely dictates the value of the USD, and gold is priced using the USD, low rates are best for the precious metal. Throughout the year, the Fed has been adamant about their plans to increase this rate. However, they have failed to do so due to poor economic conditions. The maintenance of the low rate has helped to support growth in the price of precious metals across the board.

So, What's Changing?

There are a couple big factors that led to the gains in gold, and both of them have started to change...

  • Global Economic Conditions – Global economic conditions are starting to improve. After big stimulus efforts out of China, Japan, Europe and most recently, the UK, things are starting to be looked at more positively by investors. As a result, safe haven demand is starting to decline in a big way, leading to declines in the price of gold as economies around the world continue to stabilize.

  • Federal Reserve Rate – Throughout the year, global economic concerns have put a damper on the US economy. This has forced the Federal Reserve to delay a rate hike. However, this is changing as well. Recent economic reports out of the United States have been overwhelmingly positive. Jobs growth is back up to par, new home sales are higher than anyone expected, and things seem to be moving in the right direction. As a result, there are increased expectations of an interest rate increase that could be coming down the line any time.

What We Can Expect To See From Gold Ahead

Moving forward, I have a relatively mixed opinion of what we can expect to see from the price of gold. First and foremost, as economic conditions improve around the world, we can expect less safe haven demand, leading to high volatility. However, there are a couple of things that gold has going for it as well.

First and foremost, September is just around the corner, and this has been a historically strong month for gold. The reason for this is that the wedding season in India starts in October, and demand for gold out of the country skyrockets. So, this could support growth, even with less safe haven demand.

Also, while economic conditions are improving, the improvements are the result of experimental monetary policies. As a result, safe haven demand will likely remain high for some time to come. After all, if these experiments go badly, we could see a global economic crash. In which case, the price of gold will skyrocket.

At the end of the day, there are good and bad pieces of data for gold. Only time will tell where the price is headed. However, I do remain cautiously optimistic. With the Indian wedding season just around the corner and more questions than answers with regard to the global economy, I'm expecting that there's still room for growth in the price of the precious metal. 

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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.