The Gold Price Correction Is An Opportunity

Friday, August 26, 2016

gold opportunity

Gold has had a tremendous year in 2016, for the most part. However, more recently we've seen some big declines. In fact, we've watched as the price of gold has gone through a correction subsequent to news from the Federal Reserve that became available earlier in the month. However, the big question is whether or not this correction is an opportunity.

What Causes Movement In The Price Of Gold?

Before we get into why I believe that the declines we've seen recently are an opportunity, it's important that you understand just what causes the price of gold to go up or down. With that said, the movement in the commodity is all based on supply and demand. Ultimately, when supplies are high and demand is low, the price of the commodity declines. Adversely, when supply is low and demand is high, the price of the precious metal generally sees gains.

However, it's not always that simple. Because gold is a safe-haven investment, there's a bit more complexity in determining price movements. At the end of the day, market and economic conditions can cause big shifts in demand, leading to further price movements surrounding gold. When conditions are positive, there's less safe-haven demand, and gold tends to fall. Adversely, negative conditions will lead to a boost in demand.

Another thing to consider is that gold is commonly used in jewelry and decorations. Different times of the year tend to lead to higher and lower demand for jewelry, also shifting the price of gold. So, jewelry demand is important to keep tabs on.

What's Causing The Correction In Gold

Now that you know what causes movement in the price of gold, understanding why the price is falling is relatively simple. Earlier this month, the Federal Reserve released an incredibly hawkish report known as the FOMC meeting minutes. The report showed that the Fed sees the United States as being on track to meet targets relatively soon. This means that the Fed is getting closer to an interest rate increase.

When the Fed increases its interest rate, the value of the USD is likely to head upward. Because gold is priced using the USD, this will make the commodity more expensive around the world, leading to declines in demand.

Where's The Opportunity In This?

At first glance, it may seem as though the opportunity dies with the prospect of higher interest rates. However, that's not the case at all. You see, there are a few things that could cause the price of gold to climb ahead, leading to an overall bullish view...

  • Global Effects Of A Higher Interest Rate – A higher interest rate bight lead to gains in the USD, but the Federal Reserve isn't going to hike it dramatically. They know that a higher USD plays a massive role in the commodities market and the state of economies both emerging, and developing around the world. So, the hike is going to be relatively small. And even if the USD does head slightly upward, further safe haven demand as a result of the global effect of the rate hike will likely outweigh declines in demand due to a higher USD value.

  • India Wedding Season – Historically, September has been a month of gains in the demand for and price of gold. That's because the wedding season in India starts in November. As the world's second largest consumer of gold, India tends to prop the value of the commodity up leading to and throughout their wedding season.

  • Global Economic Unrest – While conditions may be improving in the United States. Around the world there is still quite a bit of unrest on an economic level. As a result, safe-haven demand is likely to stay high and could increase throughout the foreseeable future. 

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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.