gold investment, silver investment

Precious metals investment terms A to Z

Industrial Production

Can you imagine a world without a GDP? It’s not easy, is it? That’s because GDP is the key widely used indicator. But it’s a recent invention. Prior the WWII and the Great Depression, there was no national statistics. Economist relied on freight hauling data, stock market (with Dow Jones as key index) and mainly industrial production to get the picture of the overall economy.

In the US, the Fed publishes each month the report on industrial production (as well as on capacity utilization), which measures the output of the industrial sector. It covers manufacturing, mining and utilities.

Nowadays, industrial production has lost some of its importance, as it does not include services which are now the dominant sector of the economy. However, it is still a valuable indicator, as – together with construction – it accounts for the bulk of the variation in GDP over the course of the business cycle.

This makes industrial production an important tool for forecasting future economic performance – indeed, it is one of the few key indicators the NBER take into account in determining the date of recessions and expansions. Last but not least, the Fed closely monitors the industrial production, as when the money supply rises and factories produce near full capacity then there is a chance that inflation will increase soon.

Industrial Production and Gold

All this allows us to suppose that there might be a considerable relation between gold and industrial production. Let’s analyze the chart below to check it out! As one can see, there is a positive correlation between the industrial production index and the price of the yellow metal, which amounts to 0.68.

Chart 1: Industrial production index (red line, left axis, 2012 = 100) and the price of gold (yellow line, right axis, London P.M. Fix, in $) from January 1972 to January 2019.

Industrial production index (red line, left axis, 2012 = 100) and the price of gold (yellow line, right axis, London P.M. Fix, in $) from January 1972 to January 2019

It’s a bit surprising as gold is considered to struggle when the industrial sector and the overall economy shines. The explanation is the inflationary character of the industrial production we mentioned earlier. In the 1970s, the expansion in the industrial production coincided with the surge in inflation, so the gold shined. However, after the Great Recession, the industrial production rebounded, but inflation remained stubbornly low – so the yellow metal struggled. Indeed, the correlation coefficient between these two series turned negative then.

Hence, industrial production might be a useful indicator to observe by the gold bulls, but they should not rely solely on it. Instead, the precious metals investors should always analyze several indicators to understand the broad economic context.

We hope you enjoyed the above definition. We encourage you to learn more about the gold market – not only about the link between industrial production 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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