Three Reasons Gold Still Has Room To Grow

Friday, April 22, 2016

Gold has had an incredible time in the market thus far this year. In fact, the precious metal has moved up by around 50% since the start of the year. Moreover, there is evidence I'm seeing the metal is likely to continue climbing in value much further. In fact, there are three reasons why I believe that the value of the precious metal is going to have an incredible year. Here they are.

Gold Is A Bet Against Central Banks

Gold is a safe haven investment. Therefore, when investors are concerned with market or economic conditions, they tend to flock toward the precious metal as a way to keep their money safe. Gold can also be considered to be a bet against the central banks. After all, central banks control monetary policy around the world. Consequently, when you're betting on poor economic conditions, you're making a bet that central banks are likely to make the wrong move.

Well, believe it or not, these types of bets are happening, and they are happening more and more often these days. You see, the average investor isn't happy with what's going on with central banks around the world. In the United States, the Federal Reserve continues to toy with increasing interest rates, knowing that doing so would likely be a bad thing for the global economy as a whole. Not to mention, Europe and Japan have sent interest rates into negative, essentially taking away the little value that their currencies held. The bottom line is that at the moment, investors are betting against central banks…and they are right to do so!

Gold Shortages

As with any other commodity, gold is largely dependent on the law of supply and demand. When supplies are low and demand is high, the value of the metal climbs. Adversely, when supplies are high and demand is low, the value of the metal generally declines. Well, there's no secret that demand for gold is climbing, but what about supply?

Well, in mid-January, it was announced that the world's largest miners of the precious metal believed that we have reached peak supply. We will never be able to mine more gold than we did last year. Furthermore, this year mining activities are likely to yield about 3% less of the precious metal than last year. That's definitely going to cut into the supply of the metal. However, the supply issue goes beyond that.

You see, China has spent years hoarding gold. In fact, by law, you can bring gold into China. However, once it makes it there, you cannot take it out. As a result, we see a massive stockpile of the commodity that China wants to see as a world currency retained in the country and out of the market. So between China and gold availability in mines, the supply of the precious metal is declining in a big way.

A Declining USD

Finally, gold is priced using the USD. As such, when the USD is up in value, gold becomes more expensive in nations outside of the United States, reducing demand and ultimately its price. However, when the USD sees declines, the cost of gold declines in other nations. This makes gold more affordable…and results in increasing demand.

Well, take a look at the USD lately. The currency hasn't been doing well, largely due to moves made by the Federal Reserve. As the USD continues to fall in value, the price of gold is likely to continue rising as demand around the world grows. 

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.