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Why Is Gold Up When The U.S. Economy Grew 3.2%? Dive Deeper, Say Analysts

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(Kitco News) - On the surface, the U.S. economy appears to be on solid footing after growing 3.2% in the first quarter of 2019.

However, the better-than-expected headline data has not had the expected impact on markets as gold prices are trading at their highs for the week. Meanwhile, the U.S. dollar is on the back foot, retreating from its recent two-year highs. June gold futures last traded at $1,290 an ounce, up 0.80% on the day. At the same time, the U.S. dollar index last traded at 97.92 points, down 0.22% on the day.

For some commodity analysts, the answer to gold’s unexpected move lies in the details of the report. Economic growth was driven in part by a strong build in inventories and better-than-expected trade data. However, some economists have said that these are not sustainable trends.

“Stripping out trade and inventories, final sales to domestic purchasers increased by only 1.4%, which is the smallest gain in more than three years. That is a much better guide to the underlying strength of the economy,” Paul Ashworth, chief U.S. economist at Capital Economics. “Under those circumstances, we continue to expect that overall growth will slow this year, forcing the Fed to begin cutting interest rates before year-end.”

Some economists note that personal consumption increased 1.2% in the fourth quarter, its lowest rate in years.

For the gold market, Darin Newsom, president of Darin Newsom Analysis, said that there is enough fear and uncertainty in the marketplace to override any optimism from the backward-looking data.

“The price action shows that the market doesn’t seem to believe that data,” he said. “The overall uncertainty and global political chaos are keeping a bid under gold.”

Bart Melek, head of commodities strategy with TD Securities, said that the headline data is having little impact on gold prices because the market is taking its cue from the weak inflation data.

“The good news [for gold] is inflation was below expectations,” Melek said. “That helped the market to bounce higher.”

Presumably, tamer inflation means the Federal Reserve will feel less need to tighten monetary policy, and lower rates work in favor of gold. The government said the price index for gross domestic purchases rose 0.8% in the first quarter, down from 1.7% in the fourth quarter. The personal consumption expenditures index was up 0.6%, down from the previous quarter’s 1.5%. Excluding food and energy, the PCE price index was up 1.3% in the first three months of the year, down from 1.8% in the previous quarter.

Although gold is enjoying a solid bounce heading into the weekend, some analysts don’t think its momentum will last.

David Madden, market analyst at CMC Markets, said that when the dust settles, investors will continue to look to the U.S. dollar and equities for investment opportunities.

“Growth is still better than compared to Europe, and that will continue to support the U.S. dollar and weigh on gold,” he said. “Ultimately, the Federal Reserve is in a better position than the European Central Bank.”

Jim Wyckoff, senior technical analyst at Kitco.com, said that it’s not economic data that is moving markets Friday but it’s more a function of technical-chart activity. He explained that gold is catching a bid because the U.S. dollar is seeing some technical selling pressure as investors take profits ahead of the weekend and after the greenback hit a two-year high earlier in the week.

“The weaker greenback and a bit of selling pressure in the U.S. stock market are also working in favor of the precious-metals market bulls,” he said.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.