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What the US Inflation Outlook Spells for Gold

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Apr. 17 2017, Updated 5:35 p.m. ET

Inflation hedge

Investors tend to hold gold in their portfolios as insurance against inflation. When inflation is high, the value of paper currency falls in terms of the goods and services it can buy. Investors want something that doesn’t lose its value. So gold usually has a direct relationship with inflation. Demand for gold increases as inflation increases, and vice versa.

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US inflation measures

There are two common measures of inflation in the United States (TIP). One is the CPI (consumer price index) released by the U.S. Bureau of Labor Statistics. The other is the PCE (personal consumption expenditure) index issued by the U.S. Bureau of Economic Analysis. The Fed states its objective based on the PCE index.

Accelerating inflation

In February 2017, PCE inflation rose 2.1% from the prior year. That’s higher than the year-over-year rate of 1.9% in January 2017. The core PCE, excluding food and energy, was 1.8% for the 12 months through February. It’s still below the Fed’s target of 2.0%. The Fed is confident that inflation will move to 2.0% target in 2017.

On the one hand, rising inflation is good for gold prices, as gold doesn’t lose its value like currency in times of higher inflation. On the other hand, a steady rise in inflation will encourage the Fed to raise interest rates. Higher interest rates are detrimental to the outlook for gold since it doesn’t generate any income apart from capital gains.

Gold prices affect companies such as Goldcorp (GG), Barrick Gold (ABX), Agnico Eagle Mines (AEM), and Kinross Gold (KGC). Gold prices also affect gold-backed funds such as the SPDR Gold Shares (GLD) and the VanEck Vectors Gold Miners ETF (GDX). Both funds invest in all the stocks we’ve mentioned.

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