No doubt that the US economy is a major factor affecting gold prices. And the US different economic data is an indicator on how strong is the world economy.
The world’s leading economy is, no doubt, influential. It effects how the world is going, and in turn, affects the global price of gold. The main economic number the US releases that raise awareness on how the world supper power economy’s is progressing are the Gross Domestic Product (GDP), the employment data and interest rates. Gold investors wait for the release of these data along with other investors with a slightly different attitude. The main difference between the gold investors and other investors is, they are looking for the strongest signals and long term performance of the economy. They know exactly well that gold is not an investment; it’s a safe haven hedge asset with relatively low risks on the long run and almost zero returns.
Other important numbers can be obtained from watching different markets and reading the news. By putting these parts together, an idea about the future of gold prices on the long run can be roughly estimated. Keep in mind that gold is a very special commodity; with its long history of usage as money make it relatively stable. On the other hand, gold ETFs such as SPDR Gold Trust (NYSEARCA: GLD), the largest physically backed exchange-traded fund, and gold mining companies’ shares like Barrick Gold Corporation (NYSE: ABX), the largest gold mining company in the world, are investments tools. These gold investments are also effected by the economic performance of the US.
The three main indicators numbers about how strong the US economy, are the GDP, the unemployment numbers claims and the interest rates in banks. The last two numbers contributes in the estimation of the GDP. While the three numbers together gives us a rough but genuine idea bout real inflation rates, real wages and consumer confidence. All these factors strongly affects, either directly or indirectly, gold price in the US which in turn affects gold prices around the world.
Low interest rates are supposed to encourage investments, because borrowing becomes cheaper, and that’s the main idea. But it also discourages spending if there is a lack in venture capitals because the risk goes higher due to low confidence in banks and governments. This already low confidence decay even more with the lack of jobs and steady incomes. If a US citizen earns $2,000 per month, and spending somewhere near $1,800 on essentials like rent, food and service bills, he wouldn’t possibly save enough to start his own venture nor he could ask a bank for a loan to increase his debts. If I were him, I’d buy a gold coin with the little I have left and save till they reach a reasonable amount to start my own venture.
This increase in prices on a pace faster than the increase of wages and salaries is what economists call: inflation. It is where paper money losses value to buy me what I need to have. Consumer Price Index (CPI) is a measure created to measure the price of common household goods, but it might not include food, energy and utilities, education and health. But most of us include these elements as key spending that can’t be touched. Moreover, there are new services and commodities that emerged in the US as a necessity in the past few years that is not included in this indicator. This is a major economic indicator, as gold prices increase by the growth of inflation rates, sometimes in folds, and vice versa. That’s one of the reasons feds economists say that gold acts as money. What really happens is, people through different ages and cultures consider gold is the money, and the papers we call currencies are just an easier way to carry the value of the physical metal.
So, the employment rates and unemployment claims are a good indicator on how the economy is heading. India, for example, gained a reputation in outsourcing call centers and IT developing. While China, for instance, gained a reputation in manufacturing goods. Both economies nowadays rival that of the world richest nations such as Japan, USA and major European economies. So, the employment rates and unemployment claims are the real economic effects of inflation, investing success rate, currencies’ values, political conditions and natural environment.
If there are investing alternatives, people wouldn’t think of putting their money on gold, yes? Actually, that’s true. Gold doesn’t generate income, and its price fluctuates on speculations and demand and supply basis. But in the current state, there are no jobs, low interest rates, real inflation and no venture caps for speculations around the western world. So, what are the alternatives? Stock market has always been attractive in the US, but it needs a lot of knowledge and insight. The same as any other venture, it needs sufficient knowledge to minimize the risks. Each one of us at least knows someone who ventured in a new business without the proper knowledge and ended dramatically sad. They didn’t lack the will or patience, but they over-expanded or suffered heavy losses because they didn’t know the insides of this new business. Unlike gold, everyone knows how to save it, how to buy it, and how to sell it. Other than gold speculators and traders, it’s rare to hear about someone lost money on gold. They either get scammed or thought of gold as a short-term investment.
The bottom line is, if there are jobs and plenty of real money that can buy our needs, people wouldn’t think of gold as they think about it now. On the contrary, if real wages and the value of money decreased, people will actively think in converting their hard-earned money to something that can counter this inflation. The US economic data is one of the main indicators we use to convert this emotional observations into a rational number that can be calculated. That’s where we know the time gold shines as a solution to this dilemma. Whenever the demand increase and the supply decrease, it’s price increase.