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Gold And The Perils Of Uncertainty

Published 10/06/2016, 08:58 AM
Updated 02/02/2022, 05:40 AM

Gold prices plummeted on Tuesday, decreasing 3.3%, breaking a key support level of $1300. A sell-off so considerable hasn’t been seen since the summer of 2015 and much speculation has circulated around the cause of the slump. The commodity has historically been a safe-haven in times of uncertainty as investors seek to increase exposure in commodities and bonds. So why, with such volatility in the market at present, have investors moved away from Gold?

Analysts have suggested that the United States rate decision is central to the commodity’s decline. The Federal Reserve have hinted that an increase in interest rates is imminent. The Fed’s intent is starting to bolster investor confidence in the US Dollar. The inverse relationship between the USD and Gold are apparent; while USD increases, Gold decreases. It may be a prediction of what is to come in December, the market may be getting ready for an interest rate hike.

Speculation in the market around the European Central Bank (ECB) may also have had an apparent effect on the sell-off of the metal. The ECB have hinted they will slow down on their purchase of bonds. The decrease in purchase of bonds may be the first step in ending Quantitative Easing in Europe. President of the European Central Bank Mario Draghi has repeatedly suggested that Quantitative Easing will start to come to an end in 2017.

Gold prices could continue to be volatile in the final months of 2016, we may see the precious metal’s price quickly increase; uncertainty will increase as the November United States Presidential Election nears. Furthermore, if Janet Yellen and her colleagues decide to hold off on a rate hike until 2017, the result could be a rise in gold and decline in the valuation of the US Dollar. As Europe approach a post- Brexit economy, contagion has spread and uncertainty over Europe’s future is on every investor’s mind. Gold may be a welcome shelter in a storm of unpredictability.

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