Assessing gold variables
As we saw previously in this series, the US economy started showing signs of improvement in recent weeks. While firming up of inflation is positive for the economy, we need to see more evidence that suggests it will consistently move towards the Fed’s target. Labor market indicators are also suggesting continued strength. This is positive for the economy.
The expectation of the Fed’s rate hike is an important factor that’s having a huge impact on gold price dynamics right now. The Fed has a dual mandate of maximum employment and stable prices—or 2% PCE (personal consumption expenditure). Any factor that seems to contribute favorably to that mandate fuels a sell rally in gold and vice versa.
Variables include pressure on gold prices
In contrast, the expectations of Greece defaulting on its payment to the IMF (International Monetary Fund) might support gold prices to an extent. However, it will also lead to weakness in the euro and strength in the US dollar. This will be negative for gold prices. It will also be negative for ETFs that are backed by gold prices like the SPDR Gold Trust (GLD). It will be negative for gold stocks including Goldcorp (GG), New Gold (NGD), and B2gold Corp (BTG). New Gold forms 1.9% of the VanEck Vectors Gold Miners ETF (GDX).
What should you watch?
The US inflation rate expectations, US jobless claims, and Chicago PMI (purchasing managers’ index) are the key data points for investors to look at to get a sense of the direction of US economic growth following the sluggish first quarter.