Gold Prices: The USD Isn't The Only Factor To Watch

Wednesday, May 4, 2016

Gold has been a very interesting commodity to watch as of late. Throughout the first part of the year 2016, following the value of the precious metal has been quite a bit like riding a roller coaster. However, I came across an interesting article, today, that explained that if you want to know where gold is going, you have to follow the USD, as if the USD was the only factor that will send gold's value up or down. Personally, I have a bit of an issue with this assessment. Today, we'll talk about why.

I Admit, The USD Is Important With Regard To Gold's Price

First and foremost, it's important that you understand that gold does have a strong relationship with the USD. After all, the precious metal is priced using the currency. The reality is that when the USD falls in value, gold becomes less expensive in other nations. This leads to gains in demand, and, at the end of the day, gains in the price of gold. Adversely, when the USD is up, gold becomes more expensive in other nations, leading to declines in demand and declines in the price of the precious metal. At least, that's the theory; and for the most part, it holds up.

Nonetheless, The USD Isn't The Only Factor

While it's clear that the USD is important, it's also important to remember that it's not the only factor that will cause movement in the price of gold. Here are some others you should always keep in mind:

  • Market Conditions – One of the most important factors that will dictate movement in the price of gold is the condition of the market. The reality is that gold is a safe haven investment, and regardless of what the USD is doing, chances are that it will react to market conditions. In fact, early this year, the Chinese market fell dramatically. This led to a slide in markets around the world. Believe it or not, when this happened, gold was one of the first things to react. Of course, because investors saw the sky falling, they moved quite a bit of money to gold to keep their money safe in the crash!
  • Economic Conditions – As a safe haven investment, investors look to gold, not only when the market is doing poorly, but when economies are doing poorly as well. In fact, it has commonly been considered that, when you're buying gold, you're essentially betting against the central banks around the world and the economies they manage.
  • Supply & Demand – This is a big one, my friends. The bottom line is that when supplies are up and demand is down, the value of gold will fall. Adversely, when demand is up and supply is down, we will see gains in the value of the precious metal. The simple law of supply and demand has never steered us wrong, regardless of what the USD is doing.

The Bottom Line

The bottom line here is that the USD is important to watch. However, it's also important to understand the other factors that play into gold. At the moment, the USD is incredibly volatile. However, concerning market and economic conditions, mixed with just the right balance of supply and demand, will likely send the value of gold up overall, regardless of what we see from the USD in the months to come. While the USD may cause short-term volatility, in this case, the long-term trends are written on the wall. 

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.