Gold prices fell on Tuesday as US retail sales and industrial production data showed mixed signals about the health of the US economy. The data also boosted the US dollar and bond yields, making gold less attractive for investors. Let’s see how these economic indicators affect gold prices and what to expect next.
What are retail sales and industrial production?
Retail sales measure the total value of goods sold by retailers in a given period. They are an important indicator of consumer spending, which accounts for about 70% of the US economy. Retail sales also reflect the confidence and income of consumers.
Industrial production measures the output of factories, mines, and utilities in a given period. It is an important indicator of the strength of the manufacturing sector, which accounts for about 12% of the US economy. Industrial production also affects the demand and supply of commodities, such as oil and metals.
How did retail sales and industrial production perform in April?
According to the latest data from the US Census Bureau, retail sales rose by 0.4% month-over-month (MoM) in April, below the market expectation of 0.8%. However, this was an improvement from March, when retail sales plunged by 2.7%. On a year-over-year (YoY) basis, retail sales increased by 1.6%, lower than the previous month’s 2.4%.
The main drivers of retail sales growth in April were motor vehicles and parts dealers (+2.9%), gasoline stations (+1.1%), and nonstore retailers (+0.6%). The main drags on retail sales growth were clothing and accessories stores (-5.1%), electronics and appliance stores (-2.2%), and food services and drinking places (-0.6%).
According to the latest data from the Federal Reserve, industrial production rose by 0.5% MoM in April, beating the market expectation of 0%. This was also an improvement from March, when industrial production declined by 0.1%. On a YoY basis, industrial production increased by 0.2%, higher than the previous month’s 0.1%.
The main drivers of industrial production growth in April were manufacturing (+1%), mining (+0.9%), and utilities (+0%). The manufacturing sector was boosted by a surge in motor vehicle production (+4.7%), which recovered from supply chain disruptions caused by a global shortage of semiconductors.
How do retail sales and industrial production affect gold prices?
Retail sales and industrial production have both direct and indirect effects on gold prices.
The direct effect is through their impact on the demand and supply of gold. Higher retail sales and industrial production mean more economic activity, which can increase the demand for gold as a commodity, especially for jewelry and industrial uses. However, this effect is usually small and short-lived, as gold demand is also influenced by other factors, such as cultural preferences, seasonal patterns, and geopolitical risks.
The indirect effect is through their impact on the US dollar and bond yields, which are key drivers of gold prices. Higher retail sales and industrial production mean stronger economic growth, which can boost the US dollar and bond yields as investors expect higher inflation and interest rates. A stronger US dollar makes gold more expensive for foreign buyers, while higher bond yields make gold less attractive as a safe-haven asset that pays no interest.
What is the outlook for gold prices?
Gold prices have been under pressure since reaching a record high of $2081 per ounce in August 2020. Since then, gold prices have fallen by more than 3.5%, trading below $2000 per ounce as of May 16, 2023.
The main reasons for the decline in gold prices are:
- The rollout of COVID-19 vaccines, which has improved the global economic outlook and reduced the demand for safe-haven assets.
- The rise in US bond yields, which has increased the opportunity cost of holding gold.
- The strength in the US dollar, which has made gold more expensive for other currency holders.
- The lack of new stimulus measures from the US government, which has reduced the inflationary expectations.
However, there are also some factors that could support gold prices in the near future:
- The uncertainty over the pace and timing of monetary policy tightening by the US Federal Reserve, which could keep interest rates low for longer.