THE GOLD PRICE & PREDICTING INFLATION

Current Gold Price chart & it's use for forecasting impending inflationary trends

Using the Gold Price as a leading indicator for Inflation

The gold price is a leading indicator of inflation. A leading indicator is a measurable economic or financial variable that can be used to predict or forecast future economic activity or financial market trends.

Gold is often seen as a hedge against inflation, as its value tends to increase when inflation rises. This is because gold is a finite resource, and its value is not tied to any specific currency or government. As the value of fiat currency decreases due to inflation, investors may turn to gold as a store of value, which can drive up the price of gold.

Therefore, if the price of gold is rising, it may indicate that investors are concerned about inflation and are buying gold as a hedge against it. This can be seen as a leading indicator of inflation, as it suggests that inflation may be expected to increase in the future.

A falling gold price can be an indicator of deflation, but it is not necessarily a leading indicator. In some cases, a falling price of gold may indeed indicate deflationary pressures, particularly if it is accompanied by falling prices in other assets and a general decline in economic activity. However, it is also possible for gold prices to decline for other reasons, such as an increase in the supply of gold or a decrease in demand due to shifts in investor sentiment or changes in jewellery and industrial demand.

Why use the Gold price to assess for Inflation?

The primary measures used by the Federal Reserve to assess inflation are the following:

The Consumption Expenditures (PCE) price index, a measure of the price changes of goods and services purchased by households. The PCE price index is used because it covers a wide range of goods and services and is based on actual consumer spending patterns.

The Consumer Price Index (CPI) measures the price changes of a basket of goods and services typically purchased by urban households

The PPI measures the price changes of goods and services at the producer or wholesale level.

The Personal Consumption Expenditures (PCE) price index, the Producer Price Index (PPI), and the Consumer Price Index (CPI) can be considered lagging or backward indicators of inflation because they measure the price changes of goods and services that have already been sold or purchased. Lagging indicators are typically measures of economic or market performance that change after the economy or market has already experienced a shift in direction and so inflation/deflation has already occurred by the time they begin to change.

Gold prices can be better at predicting inflation than lagging indicators because they reflect market expectations of future inflation. Investors often seek gold as a hedge against inflation, driving up its price when they anticipate a decline in purchasing power. 

In contrast, lagging indicators, (The PCE, CPI & PCE), change after the economy has already started following a trend. They are useful for confirming the existence of an inflationary trend but may not be as helpful for predicting future inflation since they only provide information about past changes in prices.