Expected Economic Expansion – What will Happen to the Gold Prices

According to the recent IHS Markit Flash, U.S. Composite PMI fast economic expansion is expected along with the strong inflationary pressure. All in all, this is good for the yellow metal.

There are two different pieces of news for gold in the recent report published by the Markit Composite PMI. One is bad while the other is good. Let’s first talk about the bad news. The recent report indicates a rapid expansion in various business activities in the month of May. It can be seen in the composite index that increased from 63.5 last month to 68.1 in May, which has set new records. This growth has been observed in the manufacturing as well as the service sector. All in all, this growth is bad news for gold because it does not perform well during this period.

Now comes the good news, which is that the growth is inflationary because the rising demand has enhanced the pricing power of firms. The input cost has suddenly increased, which has led to the sudden increase in the output charges after the culmination of the Great Recession. The report also states that the current entrepreneurs have failed to find employees to fill the available vacancies, so wage inflation is also expected. Also, post-pandemic employment will be naturally lower due to the changes made in institutions. But this inflationary period is good news for the yellow metal.

Fed would use this low employment state very well by stating that there is a reduction in the labour market, demand is low, and the economy is also below the Fed’s goals; therefore, easy monetary conditions should stay the same. So, Powell would not think about interfering with the quantitative easing and increasing the overall interest rate. Increase in the prices and Fed would go in favour of gold prices.

So, it is better that the high inflation stays the same for some time. Manufacturers worry about the shortage of raw material, which could extend throughout the year and a lag in the consumer price inflation due to producer price inflation. Anyway, there is a great chance that high inflation could stay for many months if people lose trust in the central bank’s capability of maintaining price stability and Fed stays ultra-dovish. If this occurs, then inflation could go out of control as it went out of control during stagflation nearly five decades ago.

Economic expansion and Gold 

Now that you have learnt about the newest IHS Markit Flash U.S. Composite PMI, the question about its impact on gold rises. We know that strong economic activity is not good for gold because it works well mostly when the times are bad. Gold is not a fan of real growth, and it works better during the inflationary phase. I have informed readers before that the upcoming expansion will have more inflation than the previous expansion. Fed is resistant to this high inflation. All in all, this expansion is very good for the gold.