Gold is having a rough time recently; seemingly hitting fresh lows at every turn. However, all eyes are on the precious metal as the Federal Reserve works to make a decision as to whether or not to increase its interest rate. Today, we’ll talk about how a Federal Reserve rate hike would be likely to affect gold, whether or not the Federal Reserve is likely to increase its interest rate, and how to take advantage of the trends in either scenario. So, let’s get right to it…
Why A Rate Hike Would Increase The Value Of Gold
Gold is a very interesting commodity in the sense that it is not only reliant on supply and demand from the consumer side. Gold is also at the mercy of investors as it is known to be a safe haven investment. With that said, here’s how a rate hike would increase the value of gold…
- From A Supply And Demand Perspective – Let’s keep the safe haven investment side out of it for the moment. Strictly speaking from a supply and demand perspective, an increased interest rate would do wonders for the price of gold. That’s because gold, like many other commodities is priced using the United States dollar. Therefore, when the value of the USD is strong, the price of gold is higher outside of the US; leading to a weaker demand for the precious metal which in turn causes reductions in its value. However, if the Federal Reserve does make the decision to increase its interest rate, the dollar would start to feel some severe downward pressure. Therefore, as the value of the dollar felt declines, gold would become more accessible in other countries; increasing demand and therefore, the value of the commodity.
- From An Investor’s Perspective – On the investing side of things, an increased interest rate would also cause improvements in the value of gold. That’s because if the Federal Reserve does make the decision to increase interest rates, consumers would spend more money on interest and less money on goods; leading to declines in the stock market. When the stock market realizes declines, investors start to look for safe havens for their money; and few safe havens are as widely recognized as gold. This would also cause a spike in demand and a spike in the value of the commodity.
Is The Federal Reserve Likely To Raise Its Interest Rate?
In my opinion, an increased interest rate would simply be a bad idea. However, the Federal Reserve seems to have its own agenda in many cases; and this could be one of them. Nonetheless, economic statistics simply don’t point to a rate hike. First and foremost, one of the stronger economic data points we’ve seen this year has bee the US jobs reports. However, August jobs report was a bust; with the US adding far less jobs than expected and losing 17,000 jobs in the manufacturing sector. Not to mention, consumer spending continues to struggle alongside exports.
Aside from domestic instability, we also have to think about how an increased interest rate would affect the world wide economy; and it wouldn’t be good. The big question here is, “can the worldwide economy take the pressure?” With China and Europe struggling, that answer is no! However, as mentioned above, the Federal Reserve seems to have its own agenda and whether or not a rate hike is a good idea, it still may be coming!
How To Take Advantage Of The Trends Either Way
The reality is that under either scenario, binary options traders have the ability to take advantage of the trends in any direction. So, here’s how traders should react in both cases…
- Fed Increases Interest Rates – If the Federal Reserve does decide to increase interest rates, we’re likely to see gains in the value of gold. Therefore, traders should watch for call option opportunities to take advantage of the gains.
- Fed Keeps Rates The Same – If the Federal Reserve decides to keep the low interest rate, we can expect more declines from gold. So in this case, binary options traders would be best looking for put option opportunities to ride the downtrend to profits.
What Do You Think?
Where do you think gold is headed and why? Let us know in the comments below!
[Image Courtesy of Finances Online]