After posting fantastic gains through the first half of the year, the gold price has fallen back sharply over the past two weeks. The yellow metal is still up more than 18% year-to-date, but all of the focus has been on its rapid decline to begin October.
According to Daily Reckoning‘s Australia edition, a strong rebound for gold is in the cards before the 2016 calendar year is over.
Ups and Downs
The pertinent word when judging the prospects for gold’s rebound is volatility. This is to some degree always a fixture in the financial markets: prices rise and fall constantly, never trending in one direction without. This is true of stocks and bonds as well as commodities. Anything that is traded on an exchange will experience some level of volatility. It’s why price charts that track these fluctuations always have a jagged appearance, not a smooth curve or a straight line.
Even in comparison to most financial assets, however, gold and silver are fairly volatile. This is due in large measure to gold’s sensitivity the interest rates. Bear in mind that the benchmark interest rate in the United States, the federal funds rate set by the Federal Reserve, has inched higher just once in the past eight years. The up-and-down behavior is therefore more about interest-rate expectations. The perception of whether or not the Fed will raise its target rate each month has swung back and forth in a rather volatile manner for nearly two years.
It’s not just gold that responds so acutely to interest-rate forecasts. Bond yields are always closely tied to the interest-rate environment. Yet, more so than ever before, the broader markets seem to follow this indicator, as well. Traders have grown increasingly obsessed with watching the news for where Fed officials are saying interest rates will go—and when.
There is an index known as the VIX that tracks general market volatility. When volatility is low, the VIX goes down, and vice versa. Since the beginning of this week, it has risen 26%.
If there’s one thing that fits hand-in-glove with volatile trading it’s uncertainty. Generally speaking, markets detest uncertainty. The more unclear the future, the more attractive gold becomes as a hedge against a downturn and a stable store of wealth.
There are number of factors contributing to higher levels of uncertainty over the next few months, from the confusion over Fed policy to the presidential election in November. Don’t be surprised if this leads to another rally for gold before we get to 2017.
You can check out the full article from Daily Reckoning for more of their take on the likelihood of a rebound for the gold market.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.