Most of us have heard the term “Consumer Price Index” (CPI); whether or not we know what it means, is a different story. Regardless, every month government economists working in the Bureau of Labor Statistics puts out the latest CPI number, which can be used as an economic indicator.
In gold investment, CPI is used by some gold investors to predict which direction the price of precious metals is moving. Here’s a closer look at CPI and how it affects those involved in everyday precious metal trading, such as gold traders.
A Rundown on the CPI
The dictionary definition of the Consumer Price Index is a measurement of the variation in prices paid by typical consumers for retail goods and other items. Though we may be unaware of it, the price-change experience the CPI measures is felt by all urban consumer groups (including yourself) every day. The CPI is the average change over time in the price paid by said urban consumers for a set of consumer goods and services (i.e. how much you can buy with each paycheck).
Currently, the real world basket of goods/services being measured by the CPI includes prices for food, housing, transportation, clothing, communication and education, and other goods and services. In this way, CPI is a measure of the current degree of inflation or deflation in the economy, though it does not give a full picture of the effects of the inflation.
There are also several different types of CPIs published, some that are for specific locations only, ones that show an alternative set of goods, or various other differences. For the purposes of precious metal trading, investors use the broad index as their metric for predicting gold price levels.
The CPI and Gold Prices
Gold has been a prized possession for human for thousands of years, making it a viable investment option in the long-term regardless of the volatility in spot gold prices that can be seen in the short term. As an example, during one week in June 2014 the price of gold dropped from a stock market rally, shot back up to over $1,300, plunged to its lowest level in a month, then sky-rocketed to record highs after revived tensions in the Middle East. How can investors react to such quickly moving prices?
As a price change trends and inflation measurement, the CPI is one of the economic indicators investors look at to understand fluctuation of spot gold prices. Though the CPI is unable to predict a rise and fall in gold prices, it can serve as a signal for possible market frenzy over the price of gold. For instance, if a few substantial investors or many small investors felt threatened by a weak dollar, they would tend to favor gold, increasing demand on the metal, thus driving prices higher. On the other hand, deflation would have the opposite effect with a strong dollar causing investors to selloff gold.
Inflation and deflation, however, can’t completely predict the reaction of the gold market. One outlook investors can choose to take is that gold will always be a valuable asset in any investment portfolio because despite volatility month-to-month or year-to year, the overall value of gold will increase over time. Simply buy the gold when prices are low and hold on when it goes up.
Taking advantage of this inherent value characteristic of gold is easier than most people think, it just requires a little research.