The Citi U.S. Macro Economic Index has recently plunged. What does it imply for the gold market?
The chart presented below has recently gained popularity. As one can see, the U.S. economic data has recently disappointed expectations. The U.S. Economic Surprise Index plunged in June to its lowest level since August 2011.
Chart 1: Citi U.S. Macro Surprise Index and S&P 500 Index from 2015 to 2017.
The index measures how actual data readings compare with expectations. A reading above zero means that the data beats expectations on balance, while a negative reading indicates that hard economic data disappoints expectations. We are now at about -80, a collapse of almost 140 points since April. No wonder some analysts are afraid of the upcoming recession or stock market crash. Indeed, there are some reasons to worry, and some analysts were clearly too optimistic about the so-called Trump trade. If the stock market follows negative economic news, gold should shine.
However, we may look at the presented chart from a completely different perspective. Since the index is mean reversing (expectations eventually convert to reality), we could see the rebound in the near future. In other words, the index is likely to come back, as it has a natural pull towards zero. Indeed, the Citi U.S. Economic Surprise Index is now at a level where it usually picked up over the past couple of years (while the Citi Eurozone Economic Surprise Index is at very high level right now). The rebound of the index would not be a positive scenario for the yellow metal, as data beating expectations would strengthen the U.S. dollar, gold’s major antagonist.
To sum up, the Citi U.S. Economic Surprise Index fell in June to multi-year low. Although it might seem as worrisome (and indeed there are many justified reasons for anxiety), investors should not be too excited about the plunge – it creates potential for a rebound, which would not be positive for the gold market.
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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.
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