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What Investors Should Know about Gold's Key Drivers

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Part 3
What Investors Should Know about Gold's Key Drivers PART 3 OF 12

Gold Prices: Can Inflation Reach Fed’s Target?

Inflation

US CPI (consumer price inflation) inflation might have just started picking up pace after remaining weak for months. Inflation rose 0.5% in September compared to a 0.4% rise in August. The figure, however, was still lower than economists’ expectations of a rise of 0.6%. On an annual basis, inflation rose 2.2% in September as compared to 1.9% in August. The improvement in inflation during September is due to the rise in the gasoline index, food index, and energy index. Core CPI (excluding food and energy) was up 1.7% annually in September. The Fed is very focused on core inflation right now.

Gold Prices: Can Inflation Reach Fed’s Target?

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Inflation and the Fed

Employment rates and inflation are the two key things that the Fed considers before deciding on rate hikes. The Fed has been viewing the weaker inflation in 2017 as transitory. The Fed’s preferred gauge of inflation is PCE (personal consumption expenditure), which is also running below its target of 2.0%. The index has risen 1.4% through the 12 months ending August 2017.

The Fed’s objective and gold

The recent inflation data has been helped by rising energy prices, which rose the most in August since January 2017, but this might have been due to the impact of Hurricane Harvey. Most economists believe that a broader pick-up in inflation in the US might require more time. The Fed will be closely watching the inflation data to make a decision regarding the rate hike in December 2017.

Higher interest rates are usually negative for the gold outlook. Gold prices (GLD) affect key gold stocks (GDX) (GDXJ) like IAMGOLD (IAG), Gold Fields (GFI), Kinross Gold (KGC), and Agnico Eagle Mines (AEM).

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