Strong Economic Data Cause Declines In Gold - Will This Last?

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Gold
An employee sorts gold bars in the Austrian Gold and Silver Separating Plant 'Oegussa' in Vienna, Austria, December 15, 2017. REUTERS/Leonhard Foeger

Lately, we’ve seen a slew of strong economic data out of the United States, and it is making the gold bugs nervous. After all, there’s a general belief that strong economic data is bad for the price of gold.

On Monday, the flood of positive economic data ensued with an existing home sales report out of the United States that proved to be overwhelmingly positive. As one could imagine, gold is down as a result. However, these declines aren’t likely to last long. If for no other reason, the declines won’t last long because the pre-conceived notion that positive economic data is bad for gold is a flawed one.

The Data That Sparked Fear Among Gold Bugs

The primary reason that gold dipped in value on Monday has to do with the fact that existing home sales in the United States proved strong growth. The idea here is that strong economic data will lead to further increases of interest rates from the Federal Reserve, leading to higher competition in the safe haven space from bonds. We’ll get into why this notion is all wrong in a bit. For now, let’s focus on the data.

On Monday, the National Association of Realtors released a report of existing home sales for the month of March. The report showed sales jumped by 1.1% in the month of March, bringing sales to a seasonally adjusted annual rate of 5.6 million. The news signaled a positive sign for the United States economy, especially considering the conditions under which the growth took place.

The truth is that recently, conditions for home sales have not been positive. In fact, throughout 2018 thus far, we’ve seen low inventory challenges hitting the real estate market, leading to higher prices. This would usually hinder sales numbers, but that doesn’t seem to be the case at the moment. Considering this, the positive report is a strong sign of economic growth in the United States.

This Isn’t Necessarily A Bad Thing For Gold

With positive economic data in the spotlight, the gold bugs are fearful that the strong data will lead to a rate increase from the Federal Reserve. However, the idea that this is bad for gold is generally a baseless one. Sure, we saw declines on Monday when the news broke, but this is likely simply a speed bump in the road as gold’s price continues upward from a long term standpoint.

Here’s the truth: Positive inflation is a positive for gold. The reason is relatively complex, but in the most simple of explanations, the reason that positive inflation is good for gold is that the idea that Federal Reserve rate increases are bad for gold is false. While the Federal Reserve may increase its rate from time to time, the ultimate goal of the Fed is to create a negative real interest condition. This means that the Fed wants inflation to always grow at a rate that is higher than the Federal Funds rate. Gold gains are part of what we know as inflation, and while higher rates from the Federal Reserve will make bonds more attractive, rates on bonds should never outpace the rate of inflation. So, gold will likely continue upward even under positive economic conditions.

The Bottom Line

Gold, like any other asset of value, will see its ups and downs. That’s just part of being an asset in the world we trade in today. However, from a long-term point of view, gold is generally considered to be a strong investment in terms of risk and is often used to balance portfolios. While we’ll see some negative days, overall, gold is likely to continue upward.