Learning About Finance and Money

Price Of Gold Outlook Based On 2 Key Factors

22 February 2016

Jordy De Pijper

Gold is still a long ways away from its heady days when the price of an ounce was hitting historical highs. The price has fallen from a high of $1,889.70 in 2011 to $1230.40 when the markets closed on February 19, 2016. However, the most recent price for an ounce is still $689.83 higher than the ten-year low price mark of $540.83 which was set in 2006. Gold prices tend to fluctuate greatly over time and many investors expect that trend to continue in 2016. Here are 2 key factors that will affect the price of gold in the immediate future.

Federal Reserve Rate

The U.S. Federal Reserve raised the interest rate on the federal funds rate in December 2015 and many investors believe the feds will raise the rate several more times during 2016. Higher rates make it more expensive for banks to borrow money from each other on overnight transactions and increases the interest rates you are charged for your mortgage, car loan, and other loan products. Higher interest rates can also have an effect on the price of gold, and some investors are predicting that the rate hikes will end up driving the cost of gold down. So far in 2016, the feds haven't raised the federal funds rate and the price of gold remains a little higher than it was at the beginning of 2016.

U.S. and China's Economies

The U.S. dollar is losing some of its strength when compared to the currency of other countries. The weakening may prevent the feds from raising rates in the coming year – which could help to keep the price of gold higher than originally predicted by some analysts. Helping to drive the strength of dollar down is the slumping economy of China which has lowered world-wide demand on many products and services the U.S. produces.

The weak dollar has helped to drive up the cost of gold the past few weeks since investors are worried about investing in stocks and bonds in an uncertain economy and are looking for other types of investments to put their money. The move away from stocks and bonds has recently driven up the demand, and price, of gold. 

Outlook

There are signs that the Chinese economy is beginning to improve, but those signs are tentative. Retail sales are up, housing prices and the demand for credit are increasing, and metal prices have increased which show that the economy is strengthening; but other factors like a weak yuan (the Chinese version of the dollar) and trouble with their stock market could cause the economy to falter again. If the Chinese and U.S. economies both decline in the near future, the feds would probably move to keep rate the same as now. Keeping the fed rate the same would keep the price of gold stable or let it raise a little. However, if the U.S. and China economies strengthen, the feds will probably raise rates to help control inflation and the cost of goods. As of February 2016, the rates and economic situations are too unsteady to make a predetermination on which way the price of gold will go during 2016.

For more information, talk to a local gold buyer, like Rocky Mountain Coin Inc.

Share