federal-reserve-gold

It is the end of the first quarter of 2015 and many people are still wondering what will happen to the price of gold for the rest of the year. Like 2014, gold prices have been up-and-down in the first three months of this year. As they are inclined to do, short-term traders and some longer-term investors have been reacting to every gold headline. Buyers may buy gold on news that gold jewelry sales are up in India. They may sell gold if they hear that Russia is liquidating a substantial amount of its gold reserves.

In reality, most of the headlines regarding the yellow precious metal are not substantial in determining long-term price trends. They may move prices up for a day or a week until another piece of gold news comes out and sends the price of gold back down. Don’t get caught up in the day-to-day headlines! If you want to be a successful precious metals investor, then you should direct your primary focus toward interest rates and the U.S. dollar.

Interest rates and the U.S. dollar are the two major factors that will largely determine the long-term, sustained trend of gold prices. If interest rates stay low and the dollar stays strong, gold is unlikely to perform well. On the other hand, if the Fed starts to raise rates and the U.S dollar starts to weaken a bit, gold could embark on a steady march toward $2,000 per ounce.

If the economic discussion over the last six months has not been about job creation then it has been about the actions of Janet Yellen and the Federal Reserve. More specifically, everyone wants to know when the Fed will begin to hike interest rates. For gold investors, a hike in interest rates is seen as a negative for the non-interest bearing investment. When interest rates go up, conservative, income-oriented investors may turn to other “safe haven” investments like CDs or annuities.

While Fed Chairwoman Janet Yellen likes to use language that is far from specific, she has made it is fairly clear that a rate hike will happen later this year. Whether it happens in June or December is still anyone’s guess. On the day that the first interest rate hike in years is announced, expect a knee-jerk huge drop in the price of gold. It is an expected reaction, but not a rational one.

Again, you have to take a step back and think what is actually going to occur. The Fed may raise the interest rate by 25 or 50 basis points, but they are certainly not going to set it at five percent. They may leave it there for months before raising it again in a small incremental amount. Gold will stabilize and eventually go back up as the “shock” of the new interest rate policy fades.