Inflation, Housing and Gold

We continue our updates on the state of the U.S. economy. Today, we focus on the latest inflation and housing data. What does it imply for the gold market?

Both the CPI Index and the core CPI Index, which excludes food and energy, rose 0.2 percent in May. On an annual basis, the consumer prices increased just 1 percent, while the core CPI jumped 2.2 percent, mainly due to the cost of shelter.

Chart 1: CPI (blue line) and core CPI (red line) year-over-year from May 2015 to May 2016.

As one can see in the chart above, the annual dynamics of inflation is improving, which could prompt the Fed to more aggressive actions. Indeed, the FOMC members had access to this data before their last meeting when they upgraded their median inflation projection for this year from 1.2 percent in March to 1.4 percent. Moreover, the PPI Index climbed 0.4 percent in May month-over-month and 0.8 percent annually.

Thus, inflation data is theoretically negative for the gold market, however, the Fed is still reluctant to hike. Additionally, higher inflation lowers real interest rates, which is good news for the yellow metal which usually shines in an environment of low real interest rates.

Housing starts declined 0.3 percent in May, but building permits, which foreshadow future starts, rose 0.7 percent. Existing home sales rose 1.8 percent in May, the highest level since February 2007. But new home sales declined 6 percent last month. However, homebuilders remained optimistic. Actually, the Housing Market Index, which measures home builders’ sentiment, rose from 58 in May to 60 in June. Indeed, as the chart below shows, the housing market seems to be rebounding slowly after the crisis.

Chart 2: Sales of new single-family homes from 2006 to 2016.

To sum up, the housing sector is gradually rebounding, while inflation is accelerating. Generally, it is positive news for the U.S. economy and negative for the gold market. However, as we reported yesterday, manufacturing remains at recessionary levels, and economic growth is rather sluggish. Moreover, the Fed is not likely to raise interest rates anytime soon, according to probabilities derived from futures, which should be welcomed by gold investors.

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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.

Thank you.

Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor

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