Given slow growth, a cautious Federal Reserve and the proliferation of negative sovereign yields in Japan and Europe, U.S. real rates are likely to remain low for the foreseeable future. At the same time, both core inflation and wages have been firming while the inflation drag from last year’s strong dollar and collapse in oil is beginning to fade. This is exactly the type of environment that has historically been most favorable to gold.
Market Realist – The prevailing economic scenario is in favor of gold
Given the tepid global (EFA) (IEFA) growth and negative interest rates prevalent in many developed economies, the Federal Reserve is expected to be very cautious in raising rates in the second half of the year. Additionally, consumer prices in the US (IVV) (SPY) are rising gradually and reached a three-month high of 1.1% in April—the biggest increase in more than three years.
This rise was partially due to a 3.4% increase in energy prices. Rents also rose while new housing starts and industrial production recovered by 6.6% and 0.7%, respectively. This might be an indication of a steady inflation buildup during the next few months.
Wages rising faster
The data from the Bureau of Labor Statistics shows that average hourly earnings have been rising consistently in the past few months. Earnings have reached $21.45, up by 2.5% YoY (year-over-year), and represent the highest growth since January.
On the other hand, the data from the Federal Reserve Bank of Atlanta shows that the increase in pay of the median US worker rose by 3.4% in April YoY, the highest wage growth since 2009.
Indicators are in favor of gold
The prevailing global economic scenario is likely to persist during the remaining part of the year. Hence, gold (IAU) could continue to rise, albeit moderately, due to supportive economic indicators.