(Kitco News) - The gold market is once again caught in a short-term tug-of-war, holding support above $5,100 an ounce as stagflation fears reemerge, with the U.S. economy seeing slower growth in the fourth quarter and stubborn inflation.
The U.S. Bureau of Economic Analysis (BEA) announced on Friday that the preliminary reading of fourth-quarter Gross Domestic Product (GDP) showed that the economy expanded by only 0.7%, down sharply from the initial estimate of 1.4%.
The data was significantly weaker than expected, as economists had been expecting an unchanged reading.
“Real GDP was revised down 0.7 percentage points from the advance estimate, reflecting downward revisions to exports, consumer spending, government spending, and investment. Imports decreased less than previously estimated,” the report said.
Along with disappointing growth estimates, the report also noted rising inflation pressures. The fourth-quarter price index for GDP increased 3.8%, up from 3.6% reported in the first estimate.
Providing a more nuanced look at inflation, the BEA also released Personal Consumption Expenditures (PCE) data for January, including the core PCE index, which excludes volatile food and energy prices and is the Federal Reserve’s preferred inflation gauge.
The report said that headline inflation increased 0.3%, compared to December’s 0.4% increase. Consumer prices appear to be rising in line with economists' expectations.
Over the last 12 months, headline inflation rose 2.8%, down slightly from December’s annual reading of 2.9%.
The report said the core PCE index increased 0.4% in the first month of the new year, unchanged from December. Inflation rose in line with expectations.
For the year, core PCE rose 2.9%, down from 3.0% reported in December. Core inflation was slightly cooler than expected, as economists had been looking for an increase to 3.1%.
Although inflation was relatively cooler than expected at the start of the year, many economists are largely ignoring the backward-looking data, as the U.S.-Israel joint war against Iran is generating significant economic uncertainty.
The chaos in the Middle East is creating global supply-chain bottlenecks and, in particular, driving oil prices higher, which are expected to push inflation higher through the year.
The latest economic report puts gold in a difficult short-term position, as stubborn inflation could force the Federal Reserve to maintain its neutral monetary policy longer than expected.
However, many market analysts have said that a potential stagflationary environment is the perfect storm for gold. Analysts also expect that even in the face of higher inflation, the Federal Reserve will be forced to cut interest rates to support the U.S. labor market and economy.
This environment will push real yields sharply lower, improving gold’s opportunity cost as a non-yielding asset. Currently, gold prices are seeing a modest benefit in their initial reaction to the disappointing GDP data and outdated inflation numbers. Spot gold last traded at $5,120.16, up almost 1% on the day.
The PCE report also highlighted a potentially disturbing trend as consumers continue to spend, even as wages fall.
The report said that personal spending increased 0.4% in January, compared to 0.4% in December. The activity was more than expected, as consensus estimates forecasted an increase of 0.3%.
Meanwhile, personal income increased 0.4% at the start of the year. However, economists were expecting income to increase 0.5%.
Some analysts have said that consumers are relying too much on credit, and specifically, “buy-now-pay-later” programs are exacerbating growing problems in the private-credit market, which could create systemic issues for the broader economy.
In a recent interview with Kitco News, Laks Ganapathi, CEO of Unicus Research, said that confidence in credit markets weakens amid persistent inflation and rising global debt.
She said a slow, prolonged collapse of private markets will create a stagflationary environment through 2027.
“This is not going to be like 2008, where everything breaks at once,” she said. “It will be slower. It will spread over time, potentially from 2025 through 2027, and it could be more painful in the long run.”
Although gold remains well supported as real yields are expected to drop in the long-term, the precious metal faces some near-term headwinds as the Fed is now expected to maintain its neutral monetary policy stance longer than expected this year.
“Underlying inflation pressures will continue to boil under the surface and next month’s print will also be elevated, impacted by the war in the Middle East. We expect the Fed to highlight the uncertainty on both sides of the mandate. Inflation will be impacted by the war and unemployment will be impacted by the disruptions in the labor market. Expect to see some important revisions in the upcoming Summary of Economic Projections next week,” said Jeffrey Roach, Chief Economist for LPL Financial in a note.
