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Gold prices push higher as U.S. GDP rises 6.4%, fails to meet optimistic expectations

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(Kitco News) - The gold market is holding in positive territory as the latest economic data shows the U.S. economy is building a full head of steam, just not as much economists were expecting. At the same time strong growth is leading to a sharp rise in inflation.

Thursday, the initial reading of U.S. Gross Domestic Product showed that the U.S. economic growth rose 6.4% in the first quarter of 2021. Despite the best growth reading in decades, the data missed expectations; according to consensus figures, economists were expecting to see robust growth of 6.8%.

U.S. economic activity is up sharply from 4.3% growth reported in the fourth quarter of last year.

“The increase in real GDP in the first quarter reflected increases in personal consumption expenditures (PCE), nonresidential fixed investment, federal government spending, residential fixed investment, and state and local government spending that were partly offset by decreases in private inventory investment and exports,” the report said.

Gold prices were trading in relatively neutral territory ahead of the report and have jumped higher in initial reaction. June gold futures last traded at $1,778.40 an ounce , up 0.25% on the day.

According to some analysts, gold prices are reacting to a sharp rise in inflation pressures. The report said that the GDP price index rose 4.2% in the first quarter. Economists expecting to see a print of 2.6%.

At the same time the report said that the core Personal Consumption Expendatures Index (PCE), which strips out volatile food and energy prices and is the Federal Reserve’s preferred inflation measure, rose 2.3% in the first quarter. Economists expecting inflation to rise 2.4%.

Looking at the components of the report, Katherine Judge, senior economist at CIBC, said consumer spending was the main driver of growth, supported by fiscal stimulus as well as the recovery in the labor market, with services that started to re-open providing a venue for spending.

The report said that personal consumption rose 10.7% in the first quarter. Economists were expecting to see a rise of 10.5%.

However, trade was a drag on economic growth the exports fall 1.1% in the first quarter, compared to a 22% gain in the fourth quarter. At the same time imports expanded 5.7%, compared to a 29.5% rise in the previous quarter.

Although the data was slightly weaker than expected. Adam Button, chief currency strategist at Forexlive.com said that investors should look beyond the headlines.

“Looking through these numbers, the underlying picture is even stronger than the headline. Trade and inventories were a big drag in the quarter but consumer spending and investment bode well going forward,” he said.

Judge also said that she thinks the U.S. is in a good position to see significant growth in the second quarter.

“Assuming that Covid variants remain contained, the second quarter is set for a further acceleration in growth as the re-openings continue,” she said.

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