All That Glitters May Be Losing Some Shine

The Correlation between Gold Prices and US Economic Data is Absolute

On Monday, 19 June 2017, gold prices declined on the back of decreased demand from retailers, jewelers and various industries. Gold also weakened as the USD strengthened ahead of a statement by a leading Fed FOMC official vis-a-vis monetary policy. Gold is a safe-haven financial asset which appreciates during times of geopolitical uncertainty, and depreciates when equities markets are running red-hot.

Currently, we are seeing some interesting trends taking place, with gold advancing alongside Wall Street bourses. As the USD strengthens, foreign buyers of the precious metal can purchase less gold for every unit of their currency. The Fed rate hike on June 14 raised the federal funds rate by 25-basis points. While this had a muted effect on the USD, it does not bode well for gold which is a dollar-denominated commodity. Further, gold does not earn interest, and the opportunity cost of holding gold is high with rising interest rates.

US Homebuilding Figures Plunge: How Does this Affect Gold Prices?

May marked the third successive month of declines in US homebuilding figures. The current figures are now the lowest in 8 months as construction activity across the United States continues its inexorable decline. This could severely hamper US GDP growth in Q2 2017. Gold typically rallies on the back of geopolitical uncertainty and poor economic data.

There is currently a deficit in the number of properties available in the US market, and slow housing starts growth is boosting prices. Currently, the US unemployment rate remains at its best level in many years with unemployment figures of just 4.3%. The tight labour market means that there are limited opportunities for growth in the sector. US GDP has been boosted by housing since Q4 2016.  The Federal Reserve Bank of Atlanta estimates Q2 GDP growth of 2.9% – that marks a 1.7% increase over Q1 2017.

The broad decline in construction activity is indicative of the general slowdown in US GDP. Any negative or depressed growth prospects tend to channel investors away from equities markets towards safe-haven assets such as gold, silver, the Japanese yen and the like. US homebuilding figures are doing precisely that. But the movement in the gold price is more general; it is dependent on the sentiment expressed by monetary authorities like the Fed, fiscal policy, White House budgetary plans and the like. The general feeling is that the US economy is less bullish than what was expected at the inception of the Trump presidency on November 8, 2016.

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