Gold Price Takes A Dive On Further Rate Hike Speculation

Wednesday, October 5, 2016

gold bars

It looks like we're in for more of a turbulent ride with gold as new data released suggests that the Federal Reserve will increase its interest rate in December. Today, we'll talk about the data that was released, why gold investors pay such close attention to the Federal Reserve's interest rate, and what we can expect to see moving forward.

ISM Services Index Climbs Sharply

One key economic measure in the United States that's often overlooked isn't being ignored at the moment. This measure is known as the Institute for Supply Management Services Index, or simply ISM. According to the scale of the index, any reading under 50% shows economic concerns, while any reading above 50% indicates improving economic conditions. In September, the ISM services index climbed to 57.1%, which to be sure is bad for gold.

In fact, the ISM services index was so strong in September that investors are expecting the Federal Reserve will increase its interest rate in December. This following the central bank's recent inaction due to continually missing goals with regard to inflation.

Why The Federal Reserve's Interest Rate Is So Important To Gold Investors

While the Federal Reserve interest rate may not seem like a very important topic, the truth is that the rate can and generally does cause movement in the value of the precious metal. The reason for this is relatively simple. Essentially, the Federal Reserve materially influences the value of the fiat currency that we call the United States Dollar. When the Federal Reserve's interest rate is increased, the value of the dollar grows. Adversely, when the interest rate is reduced, the value of the greenback declines. This has been the case since the United States made the decision to leave the gold standard decades ago.

Because of the close relationship between the Federal Reserve's interest rate and the US Dollar, the rate also has a very adverse relationship with gold and other commodities. After all, the majority of commodities are priced using the USD. Consequently, when the USD increases in value, gold becomes more expensive worldwide, causing declines in demand and price. When the USD decreases in value, gold becomes less expensive around the world causing gains in demand and price.

What I'm Expecting To See

As surprising as the recent movement in the value of gold may seem, many experts in the industry, including myself largely predicted this. The truth is that we're seeing interesting economic trends around the world that are strikingly similar to the trends we saw just a year ago. In fact, the Fed's rate was last increased in December of 2015, yet another striking similarity.

Based on everything I'm seeing, and what we've seen historically considering these economic signs, I am expecting to see further declines in the value of gold in the short-run. However, everything also seems to be falling into place for yet another straw breaking the camel's back in January. That straw could be the realization that the OPEC deal isn't as positive as it is perceived to be; or it could be data following another poor spending holiday season; or it could be worsening conditions in Europe. Nonetheless, the concerns are mounting yet again -- therefore I'm expecting another dramatic decline in the market in the beginning of 2017, which should send the price of gold soaring yet again!

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.