Gold Prices Could Soar If Fed Doesn’t Raise Rates
Both silver and gold prices rose substantially in Friday trading as news of the U.S. unemployment rate spread, prompting analysts to speculate further commodity rallies.
Data show that September saw little more than 142,000 jobs created versus the expected figure of 203,000. (Source: CBC, last accessed October 5, 2015.) The letdown fuelled speculations that the U.S. Federal Reserve would not be raising interest rates by the end of this year, as the Fed had been banking on positive economic growth.
In response, the gold price saw its largest surge in nearly nine months. Not only have fewer jobs been created than analysts had expected, but wage levels have also stagnated. The official unemployment rate may have somewhat stabilized at a seven-year low of 5.1%, but this has to be considered alongside a massive drop in labor force participation, which currently sits at its lowest point since the 1970s. (Source: The Week, last accessed October 5, 2015.)
Some analysts have dubbed this latest development a wake-up call for the Fed. (Source: CNBC, last accessed October 5, 2015.)
Slow U.S. Economy is Bullish for Gold Prices
It’s quite simple, really. Gold prices are negatively correlated with interest rate movements, which raise the value of interest-generating assets such as bonds relative to non-yielding assets such as gold and silver.
Because the likelihood of an interest rate hike for this year dropped, both bond yields and the U.S. dollar fell in Friday trading. A slumping currency and falling bond yields are almost always a positive signal for commodity prices, and the gold price most of all.
This represents a major game-changer, because although few had expected promising numbers, no one had really predicted the job numbers would be so dismal. Keep in mind that the reported unemployment does not take into account those people who have effectively given up and removed themselves from the labor force.
Now, there are of course additional factors to be considered which could push gold even further upwards. Both Chinese and Russian state gold reserves are growing at a significant pace, to the point where vendors cannot keep up with the demand for physical gold and silver. (Source: GoldSeek, last accessed October 5, 2015.) Furthermore, the gold price’s decline so far this year has had a negative impact on gold mining, which will translate to less supply. When this supply and demand imbalance begins to correct itself, gold could very well skyrocket in value.
Despite having surged to more than $1,900 per ounce in 2010, the gold price has steadily declined to a multi-year low in 2015. But this latest data coming out of the U.S. labor market may finally be the signal that could give uplift to the yellow metal.
Gold Price Forecast: What Can We Expect in 2016?
Market opinion on which way the gold price will be moving is now strongly contingent on how people feel about the Fed rate hike. Gold bugs are pointing to the less-than-stellar economic data as evidence for no rate hike in the near future, while more bearish investors are sticking to the prediction that it will happen in December.
Indeed, Fed funds futures indicate a 33% likelihood that the American central bank will lift its benchmark interest rate in December 2015, which represents a 43% decline from Thursday’s estimates. The chance of a rate hike in January has now risen to 41%, and 56% for March. (Source: Bloomberg, last accessed October 5, 2015.)
As the likelihood of a Fed rate hike becomes increasingly less likely, and additional quantitative easing policies are becoming more and more likely, analysts and investors alike are turning to the stability provided by gold.
Many traders see gold, which only increases in value over time, as a poor investment when compared to interest-bearing assets such as bonds. However, gold and silver have historically been seen as safe-haven assets in the event of an economic collapse or stock market crash. If you think about these precious metals as insurance policies for worst-case scenarios instead of short-term investments to flip, their value becomes obvious.
In this economic climate, it doesn’t hurt to hedge yourself against the worst-case scenario.