Gold Price: Three Reasons There's More Upside Ahead

Friday, September 30, 2016

gold pieces

Gold has been under a bit of pressure recently. With a recent deal out of the world's largest oil producers to support growth in the price of the commodity, perceived improvement in economic conditions in the United States, and a growing USD are all leading to pressure on the price of gold. Nonetheless, I believe that the pressure is likely to be short lived. There are 3 big reasons for my opinion.

Reason #1: The Oil Deal Isn't A Big Deal!

First and foremost, the most recent story that's putting pressure on the price of oil is the fact that OPEC decided to reduce production from 33.24 million barrels per day to between 32.5 and 33 million barrels per day. As a result, gold investors are concerned. After all, increases in the price of oil could lead to global economic improvement, causing a reduction in safe haven demand.

Nonetheless, that's not quite how I see. The problem with oil at the moment is a supply glut. To be sure, the world is producing far more oil than it is using. While a reduction of around 700,000 barrels per day is a step in the right direction, it's a drop in the bucket with regard to the overall problem. According to the IEA, global demand in the third quarter for oil will come in around 800,000 barrels per day. Even at lower production levels, 33.5 million barrels of production with such low demand will still contribute to the glut in a big way.

Consequently, I believe that we'll see continued pressure with regard to inflation in the United States. Not to mention, the global economic impact of a continued supply glut will likely be massive. Therefore, I don't think safe haven demand will dissipate as a result of this news.

Reason #2: The Federal Reserve

The Federal Reserve has stuck itself between a rock and a hard place. Subsequently, it can't increase its interest rate until inflation nears targets. However, inflation isn't likely to reach targets at current recession-level interest rates. Subsequently, what we continue to see is a revolving door. Low rates lead to continued growth in consumer spending. However, this is at the expense of further pressures on businesses. As a result, we're seeing a mixed bag of financial data. The data is strong enough to lead to rate hike speculation, but not strong enough for the hike to actually happen. Subsequent to this revolving door-like activity, we're likely to see prolonged low interest rates. As rates stay low, demand for oil is likely to remain solid.

Reason #3: Global Economic Concerns

Finally, while there hasn't been much noise made about conditions in the global economy, that doesn't mean it's doing well. China is continuing to struggle, Japan unleashed an experimental stimulus package that could do as much harm as it could do good. Moreover Europe's inaction continues to concern many. To be sure the global economy is far from positive -- and that's likely to support growth in gold ahead as well.

Final Thoughts

While many are concerned about recent movements in the price of gold, I believe that the concerns are overblown. Consequently, safe haven demand has been the driving factor in the recent bull-run - and will likely continue to be a motive force with regard to future growth. 

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.