Gold Price Dips: I See An Opportunity

Friday, September 23, 2016

gold

The price of gold is falling slightly today following strong gains as the result of the Federal Reserve's recent decision. While some are meeting the declines with fear, others are looking at this as an opportunity. Personally, I'm on the opportunity side of the equation. Today, we'll talk about the recent decision made by the Federal Reserve; and why it helped to push gold upward; why we're seeing slight declines today; and what I'm expecting to see from the price of gold ahead.

The Federal Reserve Keeps Interest Rates Unchanged

As we know, the Federal Reserve has been planning to increase its interest rates at some point this year. Following recent economic data, many expected that the Fed would act in September. However, on Wednesday, we learned that the Federal Reserve made the decision to keep rates unchanged. In explaining their decision, the central bank said that inflation wasn't quite where it needed to be in order to justify a rate hike. Here's a key snippet from the FOMC meeting minutes...

“Information received since the Federal Open Market Committee met in July indicates that the labor market has continued to strengthen and growth of economic activity has picked up from the modest pace seen in the first half of this year. Although the unemployment rate is little changed in recent months, job gains have been solid, on average. Household spending has been growing strongly but business fixed investment has remained soft. Inflation has continued to run below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.”

Why This Sent Gold Upward

Ultimately, there are two reasons that the Federal Reserve's decision caused gains in the price of gold. Here's what happened.

  • USD – Like most commodities, gold is priced using the USD. Because the Federal Reserve's interest rate dictates movement in the USD, it will also cause movement in gold. In this particular case, the Fed kept the rate the same, causing the USD to weaken. As a result of the lower currency exchange rate, gold became less expensive around the world, leading to gains in demand as accessibility became less of an issue.
  • Safe Haven Demand – The fact that the Federal Reserve did not increase its interest rate suggests that the United States economy is still a major cause for concern. As a result, we're seeing more safe haven demand, leading to further gains in the price of gold.

Why We're Seeing Declines Today

When I saw that gold was declining this morning, I decided to do some research to see if any fundamental news could be causing the drop. There was nothing to be found. In many cases, when an asset's value rises too fast, we see a correction, bringing the price down to a more sustainable rate before growth continues. That's exactly what I suspect is happening today.

What We Can Expect To See Moving Forward

I maintain my bullish opinion with regard to gold. Understandably, the Federal Reserve's decision to keep interest rates low was an incredibly important one for the commodity. Ultimately, this will help the commodity continue to see growth in demand around the world. Also, considering the safe haven properties of the precious metal, current conditions not only in the United States, but also around the world suggest gains ahead. 

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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.