Gold Starts To Slump On Talks Of An April Rate Hike

Friday, March 25, 2016

Federal ReserveNo matter if you're a gold investor, stock investor, options trader, or any other type of investor, chances are that you've been watching the Federal Reserve closely. As we get closer and closer to the month of April, markets are starting to adjust, and for good reason. The Federal Reserve increased its interest rate in December of last year. After increasing its rate, the Fed announced that it would be increasing its rate between 2 and 4 more times in the year 2016. Now, some are expecting that the first rate hike of the year is coming soon. Today, we'll talk about the prospect of a rate hike, why this has anything to do with the price of gold, what an interest rate would do to gold, and what we can expect to see moving forward. So, let's get right to it...

Many Expect A Fed Rate Hike Soon

Recently, the Federal Reserve ended the March FOMC meeting. At the end of the meeting, Janet Yellen, the Chairman of the Federal Reserve announced that the interest rate would remain the same in the month of March. However, it is expected that the month of April is going to bring something different down the line. The truth is that many members of the Federal Reserve have spoken to the press with regard to their views, and many of them are incredibly hawkish with regard to what we can expect. As a result, several investors are expecting to see an interest rate hike in the month of April.

What Does This Have To Do With The Price Of Gold

At first glance, it may seem as though this has absolutely nothing to do with the market, the price of gold, or really, anything else you would invest in. However, when you take a look at what a rate hike really does, it becomes clear why this has something to do with gold and other market values. The truth is that when the Federal Reserve increases its rate, what it's really doing is adding value to the United States dollar. Ever since the gold standard was abandoned, the value of currencies is essentially the interest that is associated with those currencies. So, when the Federal Reserve increases its interest, it will increase demand for the USD, leading to gains in the value of the currency. Because gold is valued using the United States dollar, this will cause quite a bit of movement in the value of the commodity.

What Would Happen If A Rate Hike Did Happen?

As mentioned above, when the Federal Reserve increases its rate, what it's really doing is increasing the value of the United States dollar. Because gold is priced using the USD, the value of the commodity will change in a big way. If the value of the USD were to climb, the cost of gold outside of the United States would essentially rise. This would lead to declines in demand, and ultimately declines in the value of the precious metal. However, since investors are expecting that the Federal Reserve will increase the interest rate, we are likely to see gains in the USD leading up to the April FOMC meeting. Therefore, if the Fed doesn't increase the interest rate, the USD will likely fall back down in value, leading to a rally on gold like what we saw at the end of the March FOMC meeting.

What I'm Expecting To See

While some Fed members have given hawkish statements with regard to what they expect to happen, recent economic data suggests that a rate hike isn't going to happen. After all, Yellen said in her statement that there wasn't much change since the last meeting, and from now to April, I'm not expecting much to change this time around. So, get ready for a spike in gold following the April FOMC meeting. 

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.