The Hindu Business Line : Gold likely to increase on slowdown in US growth

With gold prices rising to new highs and bright prospects for the precious metal to breach the psychological $500 an ounce mark anytime soon, discussion over the health of the global economy and its relationship with gold prices has once again come to the fore.

As the US usually is the engine of the global economic growth, experts believe, the relationship between US GDP growth and gold prices would provide a good indication of the shape of things to come in the bullion market.

According to statistical tests done by Macquarie Research Commodities, the correlation between changes in gold prices and changes in GDP is -0.30 which shows that as the rate of GDP expansion declines, gold prices generally rise, and vice versa.

When a causality test was run to check whether GDP growth rate is leading or lagging changes in gold prices, it showed that changes in economic performance pre-empt changes in commodity prices.

The relationship between GDP growth and gold prices runs through several transmission mechanisms such as inflation, exchange rates and interest rates, an analyst with Macquarie Research pointed out. "With the end of cycle approaching and a forecast decline in US GDP growth, we should see further support to gold prices. Every economic cloud has a golden lining," the analyst remarked.

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