Will the Gold Rally Continue for the Rest of 2016?
Gold has surged 16% in the first quarter of 2016 after falling more than 10% last year. Spot gold prices have increased considerably in 2016 because of various factors such as better market sentiments, greater risk aversion by investors and adherence to expansionary monetary policy by major economies like US, Japan and Europe in the last few months. Since gold is not an interest-yielding investment, it naturally falls whenever there is a rise in interest rates. As long as U.S. and major economies like Japan and Europe continue to maintain low interest rates, this bullish trend of Gold will continue for the rest of 2016.
The Gold prices soared up to $1,283 per ounce on March 11 and closed at $1,232 per ounce at the end of first quarter. Gold will continue to have an upward trend because of the rising uncertainty over global economic growth; broad-based improvement in commodities and downward revisions of Fed’s tightening cycles. In 2016, investors have continued to spend their money in the yellow metal while assessing the volatility in equities and central bank policies.
Fed’s Expansionary Monetary Policy:
During the recent FOMC (Federal Open Market Committee) meeting held in April 2016, the committee members decided to maintain the same target range of 0.25 to 0.5 percent for the Federal funds rate in order to promote further growth in labor market and household spending. They also decided to maintain the Quantitative Easing and other monetary policies intact in order to support price stability and better employment opportunities. Since gold is always considered a brilliant hedge against a local currency debasement, the weakening dollar is alluring investors to spend more on gold. Demand for gold has increased in China as the government is adopting gold strategy to ensure financial stability, challenge the US dollar hegemony and to support the internationalization of the renminbi.
Economic Uncertainty in Europe and Japan:
Also Japan and Europe are pursuing low or negative interest rate along with expansionary monetary policies in order to boost economic growth, which is acting as a positive trigger for gold price rally. Demand for physical gold increased in Japan, as the central bank of Japan announced negative interest rates of 0.1% which encouraged investors to spend more on the precious metal. Gold prices are expected to remain strong in Q2 since the market remains volatile due to mounting political uncertainty in the US and Europe. European stock markets have fell several times during the last few months and remain unstable because of the long-standing issues such as Greece debt and Brexit. There has been significant increase in prices of major government bonds and commodity prices have also dropped by 0.5 percent. Gold prices against Euro have increased much higher than any other currency in last quarter.
Upcoming Brexit Vote:
Another significant factor for gold price rally is the risk aversion stimulated by the upcoming Brexit vote on June 23rd. The possible collapse of GBP due to fears of Brexit has badly hurt the investor sentiments. If the voting comes in favor of British Exit from European Union, then we can anticipate further rise in gold prices during the rest of 2016, since investors consider it as safe haven amidst the market volatility. Some market experts have forecasted that gold price could surge up to $1,400 per ounce, if UK decides to leave the European Union. But if they decide to remain within EU, the uncertainty in global equity markets will ease gradually and trigger a downward trend for gold prices which could drop as low as $1,000 per ounce.
Gold ETFs have also profited a lot from the increasing demand among investors and the Gold ETF inflows in 2016 is expected to be the highest so far, surpassing the levels of 2009. The upcoming presidential election in U.S which is to be held during November 2016 is also a driving factor for market uncertainty. The elections have caused substantial negative impact on equities in the past and hence investors are betting on gold as a safer investment. On the other side, US economy is expected to remain stable in 2016 and there is a possibility of interest rate hike in second half of 2016, which can exert downward pressure on gold. Gold bull markets have never remained a straight line up, but rather two steps forward then one step back and it’s natural to expect such fluctuations later this year. An easy way to make money for novice traders during such volatile market conditions is trading gold commodity Binary options.