Real GDP trend predicts gold price movement

Quarterly data for the period 2005-11 shows that the growth rate of “real” GDP foresees the trend of the ensuing gold prices. This trend is consistent across India, China, and the US — three of the top ten gold consumers in the world.

Unlike nominal GDP, real GDP shows the change in production of goods and services in an economy from one period to another, net of price changes. Thus, real GDP or real income would represent the purchasing power of money — the amount of goods and services that an individual can buy with a given amount of money.

Purchasing power

Tracing the growth rates of real GDP and gold prices shows that when real GDP increases, the price of gold increases (and vice-versa) in the subsequent quarter. This trend is evident for all the three countries for most quarters.

One of the possible explanations for this trend is that when consumer's purchasing power increases, the demand for gold also rises, which pushes gold prices up, and vice-versa. Since the production of gold is time-consuming, the effect on gold prices occurs with a lag.

For the graphs below, the growth rates of gold prices for the US and GDP for China have been increased and decreased respectively, by a factor of 10, to facilitate trend comparison.

Since typically the economic activity at the first quarter is significantly lower than the previous one, first quarter figures are ignored.

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