Gold Price Tied To CPI in 2021

Jan 7, 2021 08:39 AM ET
Gold Price Tied To CPI in 2021

The price of gold has surged 76.14% in the past five years. This figure is below silver that has gone up by 90.37% in the same period. Global investors have continued to be during the COVID-19 pandemic. In the first week of 2021, gold hit $1,898.60 an ounce. There is a clear indication that the precious commodity may hit $2,000 in the first quarter of the year. This commodity movement will be affected by the turn of the Consumer Price Index (CPI) and the exchange rate in the coming days.

What is the Consumer Price Index (CPI)?

CPI is identified as the mean shift in the price paid by urban consumers over time for products traded in the market. It is measured by the CPI over 12 months (1 year). Items measured here include the prices of automotive fuel (oil, gas, etc.), food products, and other utilities. According to the US Bureau of Labor Statistics, the CPI indicated for all items, as of November 2020, rose by 0.2%. This rise was in exclusion to the prices of food and energy that had variations based on their supply and demand in the pandemic.

 Consumer Price Index (CPI)

With exclusion to other products, food prices shot up by almost 5% while energy sunk due to the restrictions and lockdowns. However, the CPI for all items (combined) increased by 0.2%.

Consumer Price Index (CPI)

The 12-month average analysis indicates that CPI has risen by close to 1.2% without the seasonal adjustment. It must be noted that a rise in the prices of goods and services traded in urban areas exclusively indicates that products are becoming expensive. This situation is a sign of rising inflation. A rise in inflation tends to bring down the value of the currency.

It explains why the value of the dollar has weakened in recent days. Investors are now forced to hold their wealth in the form of a commodity, with gold being their best bet. Gold will continue to become a hedge and increase in value when this inflation extends its timeframe in the US market.

There is a direct relationship between the price of gold and the CPI. A rise in gold indicates the subsequent rise in the other. Ahead of the next CPI briefing on January 13, 2021, we are considering the fact that the CPI will continue to gain, especially after the signing of the stimulus package at the end of 2020. The year that ended in February 2020 saw the CPI gain 2.3%. This index was 0.2% higher than that recorded in February 2019.

More currency in the market leads to a decrease in the dollar value. The main risk to this understanding is the substitution bias with the product prices. The rise in the prices may be negligible in the market. This situation may fail to influence the price of gold.

Technical Analysis

 

Relative Strength Index (RSI)

The Relative Strength Index (RSI) shows that the gold trade over the five-year period capped out at $1320.70 when it was oversold. The RSI shows that gold is not overbought despite its increase in price over the years. The commodity is headed towards the $2,000, considering the purchasing level is on average terms. 


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