Gold Prices React to Economic Indicators Amid Fed Speculation

Gold Prices React to Economic Indicators Amid Fed Speculation

Gold Prices React to Economic Indicators Amid Fed Speculation

June 3, 2024 472 view(s)

Last week, gold spot price dipped $50 an ounce due to a combination of continued high inflation (reported with PCE) and a downward adjustment for Q1 GDP from 1.6% to 1.3%. This downward revision was primarily due to a decrease in consumer spending and a slowdown in business investment, both of which are key indicators of economic health.  


The Federal Reserve, a key player in the economy, issued seven interest rate increases in 2022 and four in 2023, aiming to slow the economy after several years of overstimulation from government spending in the post-COVID era. The Fed's decision to pause interest rate hikes in June 2023, noting inflation was showing some signs of easing but warning that further rate increases were likely, was a significant move. It fulfilled that warning on July 26, 2023, by raising rates a quarter-point.  


This year, there has been widespread speculation about the Federal Reserve's interest rate cuts. The hesitation of rate cuts has been due to persistent inflation, which has been higher than the 2% inflation goal set by the Federal Reserve. Inflation, a measure of the rate at which the general level of prices for goods and services is rising and, subsequently, purchasing power is falling, is a key concern. When inflation is high, the Federal Reserve may raise interest rates to reduce spending and curb inflation. Almost one year after the final rate increase in 2023, the Federal Reserve rate remains unchanged today. The potential consequences of lowering rates can increase inflation, and keeping rates high can push the United States into a recession or a depression.  


Traditionally, lower interest rates increase demand for precious metals like gold. With global markets, a recession in the United States is unlikely to skew the international value of gold. Even during the global COVID crisis, while world economies were struggling, the price of gold increased by nearly $500 an ounce. This is because gold is often seen as a safe-haven investment during times of economic uncertainty. Investors tend to flock to gold when concerned about the stability of other investments, such as stocks or currencies. Therefore, even in an economic crisis, the value of gold can remain relatively stable or increase.  


Gold Prices React to Economic Indicators Amid Fed SpeculationGold Prices React to Economic Indicators Amid Fed Speculation


Unlike many global economies, the U.S.'s slow economy is struggling with slowing production and inflationary pressures. This week, the following decisions can have an impact on the global economy:  

  • On Wednesday, the Bank of Canada will announce its interest rate decision, with economists predicting a quarter-point cut. A rate cut by the Bank of Canada could stimulate economic growth and increase consumer spending, which could have positive spillover effects on the global economy.   
  • On Thursday, the Governing Council of the European Central Bank will also make a critical interest rate decision. A rate cut by the European Central Bank could also boost economic growth in the Eurozone and potentially stabilize global financial markets.  
  • We will gain insight into the U.S.'s monthly employment numbers and consumer credit for the month of May. The recent trend in the past 60 days has been decreasing employment and increasing use of consumer credit. If this trend continues, it could pressure the Federal Reserve to lower interest rates, a development that could significantly impact the market. 

For more upcoming events that could have impact on the global economy, click here.