Will The Price Of Gold Fall Below $1,000?

Wednesday, May 25, 2016

Gold is one of the most heavily discussed commodities at the moment. If you've been watching the precious metal, chances are that you've seen $1,000 an ounce at least once or twice. Several analysts around the world believe that the price of the precious metal will fall to $1,000 per ounce or below, and all for the same reason - the Federal Reserve's interest rate hike. However, is this a real possibility? Will gold fall that low? Today, we'll talk about the Federal Reserve's interest rate, why investors believe that it will drag gold to $1,000 an ounce or below, and whether or not this is a realistic expectation.

The Federal Reserve Is Expected To Raise Its Interest Rate In June

We've talked about this topic quite a bit. So, I'm not going to harp on it for too long. Nonetheless, it is incredibly important to understand. With that said, gold is priced using the USD, and the Federal Reserve's interest rate is essentially what gives the USD its value. Because gold is priced using the USD, the commodity and the currency have a well-documented inverse relationship. This means that when the dollar rises, gold falls, and when the dollar falls, gold gains.

Because of the current monetary system in the United States, the value of the dollar lies with its interest rate. When the interest rate is increased, the value of the USD follows, and when the interest rate falls, the value of the USD falls as well. Therefore, if the Federal Reserve does make the decision to increase its interest rate, it would essentially be increasing the value of the USD, leading to declines in gold.

Why Experts Believe That Gold's Price Will Fall To $1,000 Per Ounce Or Below

The Federal Reserve has been intending to increase its interest rate multiple times in 2016. However, it hasn't been able to do so, as inflation simply wasn't strong. However, in the month of April, inflation in the United States had its best month in 3 years. So, many experts are expecting that the Fed will increase its interest rate, causing the value of gold to fall.

The stock market also plays a bit of a role in this. You see, as a safe-haven investment, gold tends to rise when the stock market isn't doing well, and fall when the market sees gains. While the global market hasn't been positive for most of the year, we are currently seeing a strong recovery. This is leading to declines in safe-haven demand. Also, with recent strong economic data out of the United States, some experts believe that the market will continue to climb, leading to more problems for the price of gold.

Is A $1,000 Per Ounce Price Target Realistic?

In my opinion, the answer is no. The way analysts see gold at the moment, in my opinion, is an overreaction at best. The truth is the precious metal has already started to price in the higher interest rate. Therefore, when it actually happens, we may see slight downward movement, but it isn't likely to be drastic.

It's also important to consider how much the Fed is going to move the interest rate. While it seems imminent that a rate hike is going to happen, it's not likely to be a big hike. Increasing the rate 0.25% isn't going to cause the USD to skyrocket too much. In fact, I think it will be surprising how little of an effect such a small rate hike is going to have. Here's the bottom line. Will gold fall? Yes! Will gold fall to $1,000 per ounce? Not likely! Is gold going to recover quickly? Most likely!

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.