Gold prices struggling as U.S. economy remains resilient and inflation fears cool

The Bureau of Economic Analysis announced the final reading of first-quarter Gross Domestic Product on Thursday, saying the economy grew 2.1% quarter over quarter, up from the previous estimate of 1.6%. The data was stronger than economists' expectations, as consensus forecasts had called for growth to remain unchanged.

“Real GDP was revised up 0.5 percentage point from the second estimate, primarily reflecting a downward revision to imports, which are a subtraction in the calculation of GDP, that was partly offset by a downward revision to consumer spending,” the report said. “From an industry perspective, the increase in real GDP reflected increases in real value added of 7.5 percent for government, 4.5 percent for private goods-producing industries, and 0.8 percent for private services-producing industries. The leading industry contributors to the increase in real GDP were information; federal government; professional, scientific, and technical services; and durable goods manufacturing. The leading offsets were decreases in retail trade, wholesale trade, and finance and insurance.”

In a separate report, the BEA also noted that while inflation pressures remain elevated, they are not accelerating. The government's core Personal Consumption Expenditures Price Index, which excludes volatile food and energy prices and is the Federal Reserve's preferred inflation gauge, increased 0.3% last month, compared with a 0.2% increase in April. The data came in line with economists' forecasts.

For the year core PCE increased 3.4%; although inflation pressures are well above the Federal Reserve’s target of 2%, analysts note that it is still not accelerating.

Rising energy prices, due to the conflict in the Middle East, remain the biggest factor driving inflation pressures. The PCE report said that headline inflation increased 0.4% last month. For the year, consumer prices increased 4.1%.  

The gold market continues to struggle, as its bear-market correction remains firmly in place, with prices dropping below $4,000 an ounce in the initial reaction to the latest economic data.
Spot gold last traded at $4,002.90 an ounce, relatively unchanged on the day.

Although the inflation data will help ease expectations that the Federal Reserve will have to raise interest rates this year, investors could continue to look for new momentum trades in equity markets following the positive GDP data.

Some analysts have noted that American equities are attracting renewed interest as a new wave of American exceptionalism sweeps through global financial markets. Despite ongoing economic and geopolitical uncertainty, the U.S. has managed to navigate the turbulent environment effectively. Specifically, the nation has weathered the global energy crisis caused by the war in Iran better than other regions, such as Europe.

Monte Safieddine, Head of Market Research at Capital.com, pointed out that the GDP-PCE combination tells the market that inflation pressures are not cooling fast enough while growth remains stronger than expected, reducing the urgency for Fed rate cuts.

“The dollar should stay bid, gold may struggle as real-yield expectations remain firm,” he said.

Jumana Saleheen, Vanguard Chief Economist, Europe, and Thiago Ferreira, Vanguard Senior Economist, said in a note Thursday that they expect the U.S. economy to grow by 3% this year, driven by expansion in the AI sector.

“While the U.S. appears positioned for structural transformation, other major economies face a more challenging balance between technological change and elevated energy costs,” the analysts said.

Although the U.S. economy continues to expand, the report noted that growth remains uneven as consumers struggle. Consumer spending in the first quarter increased 0.5%, down from the previous estimate of 1.4%.

However, the PCE report showed that consumers remain relatively healthy, with both personal spending and personal income increasing 0.7% last month, compared with increases of 0.5% and 0.0%, respectively, in April.