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How are the Consumer Price Index and Gold Related?

The Consumer Price Index (CPI) and gold share a subtle relationship. As financial markets react dynamically to economic indicators, understanding how the CPI and gold are related helps make informed investment decisions. 

The Consumer Price Index is an economic indicator that measures the average change over time in the prices consumers pay for a basket of goods and services. The CPI is widely used to assess price changes associated with the cost of living, and it is a useful statistic for identifying periods of inflation or deflation. 

The CPI may influence gold prices, but many other factors contribute to its price. Interest rates, geopolitical events, and the role of central banks all impact the price of gold.   

What is the Consumer Price Index? 

The Consumer Price Index (CPI) is an economic indicator often used to assess inflation and living cost changes. It measures the average price change over time for a basket of goods and services households commonly purchase. This index is used to make decisions on economic policy, salary adjustments, and investment decisions. 

Core CPI, a subset of the Consumer Price Index, excludes food and energy prices because of their volatility. It provides a view of inflation trends without the noise of these fluctuating costs. This measure helps central banks, like the Federal Reserve, make informed decisions regarding interest rates, directly impacting economic activities and investment strategies.  

How Gold Protects Against Inflation 

Gold has been cherished for its beauty and status as a safe-haven asset for centuries. It serves as a hedge against inflation and currency devaluation. Historically, gold prices tend to rise during economic uncertainty and high inflation, as reflected in increasing CPI figures. Its intrinsic value and resistance to devaluation by central banks make gold a reliable store of wealth.  

Investors buy gold to preserve their wealth when inflation is high or economic stability is questioned. Conversely, when confidence in the economy grows, gold prices can decline as investors seek higher returns from other assets. Gold’s historical role and intrinsic value make it a unique barometer for financial confidence and economic trends. However, its status as a store of value remains unchallenged throughout history.  

Consumer Price Index and Gold Prices 

Gold and inflation do not correlate directly. Simple linear regression models that track gold prices and CPI show very little direct influence when measured over time. Instead, what we tend to see is that gold prices correlate strongly with real interest rates, of which inflation is a component.  

Real interest rates = nominal interest rates – rate of inflation 

When real interest rates are low, gold price tends to rise. Even more so if inflation is so high, it turns real interest rates negative. This is partially because of gold’s status as a safe haven asset and the alternatives to gold. Treasuries, for example, are an alternative safe haven asset, and they have a yield. In a period of high inflation and low nominal rates, gold is preferred to treasuries which spurs gold buying and buoys the spot price of gold. If real interest rates are positive and treasuries are returning a high yield, an investor may prefer that over gold. We saw some of this play out in 2023 as the Federal Reserve raised the Fed Funds rate to combat inflation, which drove retail investment in treasuries as their yields were raised over 5% while inflation had fallen to the 3-4% range in the CPI. 

So, how does CPI fit in? In periods of inflation, the Federal Reserve may decide to set the Fed Funds rate higher to fulfill its mandate of maintaining price stability. The Fed’s goal is to keep inflation to 2%, and they may attempt to achieve this by raising the Fed Funds rate. Two measures they examine when determining monetary policy are the PCE and CPI. When the market is expecting the Federal Reserve to raise or lower rates, data from the CPI becomes more consequential to the price of gold. 

This makes more sense when you think about the equation above. If gold performs best when real interest rates are low or turn negative, then lower nominal interest rates are good for gold’s performance and a higher rate of inflation is good for gold’s performance. If the Federal Reserve has indicated they will cut rates on good inflation data (as we’ve seen in 2024) then investors will closely monitor inflation reports like CPI and make buy or sell orders based on what the reports indicate the Fed might do. 

This game of cat and mouse between investors and the Federal Reserve makes tracking and measuring the impact of inflation reports against gold difficult to quantify. Nonetheless, CPI remains an important inflation indicator that holds clues to gold’s future price action. 

CPI vs. PCE 

While the CPI is a great way to measure inflation, the Federal Reserve prefers the Personal Consumption Expenditure (PCE) when determining policies. The PCE provides a broader measure of inflation by including a wider range of goods and services and more accurately capturing changes in consumer behavior. It is also updated more frequently to reflect the latest consumption patterns, giving a more comprehensive view of inflation. 

The CPI and PCE tend to track together, and the CPI is usually higher than the PCE. The CPI report is also released earlier than the PCE report in the month, meaning it’s a leading indicator for many analysts. Both should be watched closely if the Federal Reserve is considering beginning or ending a tightening cycle due to inflation concerns. 

Other Influences on Gold Prices 

While the Consumer Price Index and interest rates are significant, other economic indicators influence current gold prices. Unemployment rates, gross domestic product (GDP), and geopolitical instability are factors that shape market sentiments and the price of gold. 

For instance, higher unemployment rates can lead to decreased consumer confidence and spending, prompting investors to seek the safety of gold. Similarly, slower GDP growth often signals economic troubles, increasing gold’s appeal as a hedge against uncertainty. War and conflict around the world also impact the price of gold, as does the strength of the US dollar. In recent years, central bank gold buying has been robust and sustained and threatens to overwhelm prior correlations in establishing new trends. 

Combined with CPI, these economic indicators provide a more comprehensive view of the financial landscape and can offer predictive insights into gold price trends.  

Quick Guides to Investing

Step 1:

Why Buy Physical Gold and Silver?

If you are concerned about the volatility of the stock market, you’re not alone. The extreme highs and lows of the stock market often lead investors towards safe-haven assets, like bullion. Historically, the Precious Metals market has an inverse relationship with the stock market, meaning that when stocks are up, bullion is down and vice versa.

Step 2:

How Much Gold and Silver Should You Have?

This question is one of the most important for investors to answer. After all, experts suggest limits on how much of any types of investments should go into a portfolio. After deciding to purchase and own Precious Metals and considering how much money to allocate, one can then think about how much and what to buy at any point in time.

Step 3:

Which Precious Metals Should I Buy?

With the frequent changes in the market and countless Precious Metal products available, choosing investments can be difficult. Some want Gold or Silver coins, rounds or bars while others want products that are valuable because of their design, mintage or other collectible qualities. Also, collectors may shop for unique sets and individual pieces for their collections.

Step 4:

When to Buy Gold & Silver

After considering why, how much, and what Precious Metals products to buy, an investor’s next step is when to buy them. This decision requires an understanding of market trends and the impact of economic factors on precious metal prices.

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