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Precious metals investment terms A to Z

Consumer Confidence Index

Confidence is a key ingredient in life and in business. It is also crucial thing for the economy as a whole. Remember the Great Recession? It was so severe partly because banks ceased to trust each other. The level of consumers’ confidence is very important economic indicator, as well. It measures the degree of optimism that consumers fell about the state of the economy.

There are a few indicators of consumer confidence. One of them is the Michigan Consumer Sentiment Index, which is a telephone survey of 500 households conducted by the University of Michigan. The report covers five sections: personal financial situation now and a year ago, personal financial situation one year from now, overall financial condition of the business for the next 12 months, overall financial condition of the business for the next five years, current attitude toward buying major household items.

The second is the Consumer Confidence Index calculated by the non-profit research organization for businesses called Conference Board since 1985. Each month, the organization surveys 5,000 U.S. households to assess consumer attitudes and buying intentions, with data available by age, income and region. The survey consists of five questions, two about the present conditions, making up 40 percent of the index, and three about future economic conditions. The former include respondents’ appraisal of current business conditions and current employment conditions, while the latter include expectations about business conditions, employment conditions and total family income in six months.

The third index is also called the Consumer Confidence Index but it is calculated by the OECD. It shows “an indication of future developments of households’ consumption and saving, based upon answers regarding their expected financial situation, their sentiment about the general economic situation, unemployment and savings capability.” The number above 100 signals a boost in the consumers’ confidence towards the future economic situation, while the values below 100 indicate a pessimistic attitude towards future developments in the economy.

Consumer Confidence Index and Gold

The consumer confidence index is an important gauge as it provides insight into the future behavior of consumers. Usually, households save more and spend less when they become more pessimistic about the economic outlook. Conversely, people save less and spend more during economic booms when their sentiment is high.

This is why the OECD considers consumer confidence a leading indicator – its increase may signal a strong consumer demand and, thus, a growing economy. Therefore, the gold prices should be correlated negatively to the consumer confidence. Indeed, there might be a grain of truth here. For example, as the chart below shows, both great gold bull markets occurred during the periods of subdued consumer confidence.

Chart 1: OECD’s Consumer Confidence Index (red line, left axis) and gold prices (yellow line, right axis, London P.M. Fix, in $) from April 1968 to February 2019.

Consumer Confidence Index and Gold Chart

However, the correlation coefficient between the consumer confidence index and the monthly average of gold prices is just -0.15, which indicates a relatively weak link between the both variables.

Another problem with the consumer confidence is that it may be actually a lagging indicator. The reason is that consumers’ sentiments change in response to economic developments such as the business cycle. They get more pessimistic during recessions, when they or someone they know become unemployed, and they become more optimistic during booms when their real incomes rise. Just look at the chart above once more. As you can see, the consumer confidence index plunged below 98 in 1979 or 2008 only when the recessions were well advanced. It means that the usefulness of the consumer confidence index for gold investors is limited – it may only confirm a pattern that is already occurring.

We hope you enjoyed the above definition. We encourage you to learn more about the gold market – not only about the link between consumer confidence and gold, but also how to successfully use gold as an investment and how to profitably trade it. Great way to start is to sign up for our Gold & Silver Trading Alerts. If you’re not ready to subscribe yet and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

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