Gold Price Takes A Dive On US Inflation Data

Friday, May 20, 2016

Gold has been my favorite commodity to watch this year, and for good reason. The value of the yellow metal has skyrocketed for most of the year, leading to quite the discussion. However, earlier this week, inflation data with regard to the United States was released, concerning gold investors, and leading to declines in the value of the precious metal. Today, we'll talk about the data that was released, why it matters for gold investors, and what we can expect to see in the price of gold moving forward.

US Inflation Data Turns Positive

US inflation has been a primary cause for concern among economists for quite some time. However, it seems as though things are starting to turn around. As mentioned above, new data with regard to US inflation was released earlier this week, and the data proved to be overwhelmingly positive. In the month of April, consumer prices in the United States rose by 0.4%. This is the biggest monthly gain we've seen in the figure since February of 2013. In fact, in the month of March, consumer prices rose by only 0.1%. We also saw good news in what is called the core measure. This measure strips out consumer price gains in food and energy products. In the month of April, the core measure rose by 0.2%, doubling what we saw in the month of March.

What Does This Have To Do With The Price Of Gold?

Looking from the outside in, it may not seem as though consumer price changes would have much to do with the price of gold. However, that couldn't be further from the case. The reality is that gold is a safe haven investment, and consumer price gains are a sign of economic improvements. You see, when economic conditions are negative, investors tend to flock to gold as a way to keep their money safe, leading to increased demand, and, ultimately, increased prices. However, the recent data shows that the United States economy is heading toward strength. As a result, gold investors are selling gold, which is leading to declines in the price of the metal. However, it doesn't stop there.

You see, gold is heavily dependent on the USD. Because the precious metal is priced using the USD, when the currency grows, gold becomes more expensive around the world, leading to declines in demand. When the USD declines, gold becomes less expensive around the world, leading to increased demand. This leads us to the Federal Reserve.

For some time now, the Federal Reserve has been planning on another interest rate increase. However, concerning economic conditions have led to delays in this plan. Nonetheless, the strong inflation data will likely give the Fed what it needs to increase its rate. When this happens, the USD will likely climb in value, leading to declines in demand for gold and, ultimately, price decreases.

What We Can Expect To See Moving Forward

While strong economic data out of the United States is holding the price of gold down at the moment, I don't believe that this is going to be a long-term trend. The reality is that global economic conditions are still overwhelmingly concerning. On top of that, if the Federal Reserve does increase its interest rate, it will likely lead to declines in the market, which will send even more safe-haven investors toward gold. Ultimately, what we're seeing is a hurdle in the path of growth for gold. However, given the trends we've seen throughout the year, and what we're seeing around the world, I believe that the commodity will easily clear this hurdle and continue to grow through the year. 

Joshua Rodriguez

Joshua Rodriguez is an avid financial professional. He is the owner and founder of CNA Finance, a partner at Modest Money, and a writer for US News & World Report, Investing.com, and more! Joshua takes a strong fundamental approach to market analysis and enjoys offering his take on what we can expect moving forward. You can reach Joshua at cnafinancehelp@gmail.com.

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