Gold Price Dives As Dollar Recovers - What's Next?

Monday, May 9, 2016

The price of gold is falling today and falling hard. Unfortunately for gold investors, the USD is recovering from a recent poor jobs report, which is taking a toll on the precious metal at the moment. Is this it? Are we at the end of the gains in gold? Not anywhere close, in my opinion! Today, we'll talk about why I don't see the declines in gold as concerning - and why I'm expecting to see more gains in the price of gold moving forward.

Current Declines In Gold Are Natural Market Trends

As mentioned above, I'm not very concerned about the declines we're seeing in gold today. In fact, the movement is to be expected. The reality is that movements in the market tend to happen through a series of overreactions. When investors are excited, they tend to push the value of the precious metal higher than a realistic support point. After a few days, the value falls to a realistic point before gaining again. This is what I believe is happening at the moment.

Late last week, the US jobs report was released, and it proved to be an incredibly concerning one. After all, the US economy does well when job growth is consistently at or above 200,000. Moreover, April's job growth came in at only 160,000. This led to declines in the value of the USD. Consequently, since gold is priced in USD, this made the commodity cheaper around the world. As a result, demand skyrocketed - and so, too, did the price of gold. However, the USD is starting to recover a bit today, leading to declines in gold as the commodity becomes more expensive in nations outside of the United States. Nonetheless, this downward movement isn't likely to last very long.

Why I'm Expecting To See Further Gains In The Price Of Gold

When it comes down to it, the price of any commodity is dictated by two all-important factors. Those factors are supply and demand. When looking at supply and demand associated with gold, it becomes clear that the commodity has plenty of room to climb. Here's what we're seeing:

  • Gold Supply – First and foremost, the supply of gold isn't going to be quite as strong moving forward as it has been in the past. In fact, in mid-January, it was announced that gold had reached peak supply. This means that the world will likely never produce as much gold in the future as it has in the past. In fact, this year alone, production of the precious metal is expected to drop by around 3%. As the law of supply and demand tells us, when supplies fall, prices must go up!
  • Gold Demand – On the demand side of the equation, we're seeing more positive news. Currently, demand for gold bullion coins is growing so quickly that the United States Mint is having a hard time keeping up. Also, gold is a safe haven investment. As a result, when economic conditions and market conditions prove to be concerning, investors tend to buy more of the precious metal as a way to keep their money safe. Well, look around, my friends. The market looks to be on the brink of another correction at least. In fact, we could see an all-out crash relatively soon. On top of that, global economic conditions are concerning to say the least. Indubitably, things aren't looking good for the economy nor the market. Consequently, that's a good thing for the price of gold.

At the end of the day, gold is going to fluctuate. While 2016 has been a great year, thus far, for gold investors, we have seen some natural declines, just like what we're seeing now. This doesn't mean that the bullish trend is over; it simply means that gold needs to get to a healthy price point before growing yet again. At the end of the day, all signs seem to be pointing toward more gains in the price of gold.

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.