Gold Price Continues Down For 5th Straight Day

Gold had an incredibly strong start to the year 2016…and for good reason. Economic conditions around the world proved to be concerning, leading to incredibly strong safe haven demand. However, more recently, we've been seeing volatility as the result of slowly improving economic conditions. Now, we're seeing yet another bear run. In fact, gold's price is down for the 5^th straight day today as the result of concerns with regard to the Federal Reserve's interest rate. Today, we'll talk about what the Fed's interest rate has to do with the price of gold, the news that is leading to the bearish activity - and what I'm expecting to see from the precious metal ahead.

What Does Gold Have To Do With The Fed Interest Rate?

At first glance, it may seem as though the price of gold and the Federal Reserve's interest rate have absolutely nothing to do with one another. The truth is it couldn't be further from the case. For some time, the Federal Reserve's rate, vis-à-vis the price of gold, have a very interesting relationship.

Years ago, the gold standard was abandoned by most of the developed world. Instead, we went into a fiat currency standard. This essentially means that the value of currencies are backed by the strength and stability that the economy associated with the country represented. One big factor associated with the value of currency today is the interest that is associated with it. Effectively, higher interest means that the value of the currency will likely rise – whereas lower interest means that the value of the currency will likely fall.

With that said, gold is priced using the USD. Accordingly, the USD is largely dictated by the Federal Reserve's interest rate. Because of the fact that gold is priced using the USD, the commodity is highly exposed to currency market movements. When the USD rises, gold declines as a result of higher relative prices around the world. Consequently, if the Federal Reserve does increase its interest rate in a big way, we can expect for just that to happen.

The News That Led To The Bearish Activity

The news that sent gold into its most recent bear run has to do with the Federal Reserve's interest rate. More specifically, members of the Fed have been espousing overwhelmingly hawkish opinions. As a result, many investors are expecting to see a September rate hike.

Most recently, Eric Rosengren made statements that showed that he backed increasing the interest rate. In his statement, Rosengren said that he believes that economic conditions in the United States are improving - and that risks associated with nations abroad are diminishing. He also explained that if interest rates are kept at such low levels, we could start to see negative effects on the US economy. For example, Rosengren pointed to increasing prices in the commercial real estate space. Effectively, his comments with regard to a possible rate hike fueled expectations that September will be the month of action.

What I'm Expecting To See From Gold Ahead

Moving forward, I maintain my bullish opinion with regard to price growth. First and foremost, let's address the rate increase. Personally, I don't think that September will be the month. However, even if it is, the increase may be relatively small and won't likely have the effect on the market that investors seem to be bracing for. Also, with the recent inaction from the ECB, I'm expecting to see global economic struggles. This, in combination with the Indian wedding season, will likely lead to support for the price of gold growth relatively soon.