Gold Prices Retreat…Is This The End Of The Bull Run?

Monday, March 21, 2016

Gold has been an incredibly interesting commodity to watch throughout the beginning of the year. As the global stock market started to crash, gold started to gain support with safe haven investors, leading to incredible increases in demand. Soon enough, the increases in demand led to an incredible bullish run, sending the value of gold to levels that we haven't seen in years. More recently, the value of gold got another big push thanks to the Federal Reserve. However, today gold is starting to retreat. Today, we'll talk about why the Federal Reserve helped to support price growth in gold, what we're seeing from the commodity right now, and what we can expect to see in gold prices moving forward.

How The Federal Reserve Helped To Support Growth In The Price Of Gold

In late 2015, the Federal Reserve increased its interest rate, lending support to the US and sending its value upward. During the announcement in which the Fed said it was increasing its rate, it also announced that it would be increasing its interest rate between 2 and 4 times in the year 2016. Earlier this month, the Federal Reserve held an FOMC meeting. During this meeting, it was expected that they would make the decision to increase the interest rate again. When the interest rate rises, the value of the currency associated with that interest tends to climb, so the market priced in a higher interest rate before the meeting. However, after the March FOMC meeting, it was announced that interest would remain the same. As a result, we saw a large decline in the value of the USD. Because gold is priced using the USD, this made gold more readily available in nations outside of the United States, causing demand to climb and the price of the commodity to follow.

What We're Seeing From Gold At The Moment

Recently, gold isn't looking quite as good as it was not too long ago. In fact, today, we're starting to watch as the price of the commodity retreats. The declines that we're seeing in the value of gold at the moment have quite a bit to do with the value of the USD. Now that the market has priced in the fact that the Federal Reserve won't be raising its interest rate, the USD is starting to go back to its normal growth path. As the USD continues to rise, the price of gold hits resistance. After all, because gold is priced using the USD, when the value of the currency climbs, gold becomes less available in countries outside of the United States. This is causing a reduction in demand, and as the law of supply and demand tells us, a reduction in the value of gold.

What We Can Expect To See From Gold Moving Forward

Because the value of gold is starting to fall, we're starting to see the bears coming out of the woodwork screaming... “The bulls are gone!” However, I don't quite think that this is the case. The truth is that when it comes to market values of any commodity, a fluctuation is something we see often. Nonetheless, I'm expecting to see further long run gains on gold. The truth is that the global economy is still struggling. Europe, Japan, and China are still working to find ways to improve economic conditions in their nations without going bankrupt. As the year continues on, this is likely to lead to a tough time in the market throughout, which will send safe haven investors flocking toward gold. On top of this, if the Federal Reserve does raise its interest rate down the road this year, we might see a dip in gold, but the real effect this is going to have is on the stock market; and we know that when stock values are down, gold values go up. So, I'm expecting for this to be a great year for gold, regardless of the current bearishness we're seeing in the market. 

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.