NCPA - National Center for Policy Analysis

Commodity Prices Follow Gold

March 6, 2014

Gold and industrial-metals prices are leading indicators of inflation, says R. David Ranson, a senior fellow with the National Center for Policy Analysis.

Changes in the prices of commodities -- goods that are uniform and widely-traded, such as metals or textiles or foodstuffs -- are generally attributed to higher or lower demand. But commodity prices are also determined by the value of the currency in which those prices are expressed, usually the U.S. dollar.

Looking at the long-run history of the dollar, Ranson analyzed the prices of various commodities over time.

  • Gold and industrial-metals are leading indicators of inflation.
  • The prices of industrial-metals (such as copper, aluminum, lead, nickel, steel scrap, tin and zinc) fluctuate widely, but they correlate with inflation. High commodity prices coincide with high inflation, as evidenced by the consumer price index (CPI). The CPI tends to rise more rapidly after industrial-metals prices rise, and vice versa.
  • Any major movement in gold prices is followed by a corresponding change in commodity prices over the next year or two.
  • Gold prices change more rapidly than industrial-metals and other commodities. For textiles, fibers, foodstuffs and crude oil, it takes a minimum of three years for the effects of gold price changes to be reflected in the prices of those commodity groups.

Ranson also looked at the relationship between real gross domestic product growth and changes in metal prices, finding that the relationship was purely cyclical. While growth has a short-term effect on metals prices, that effect does not last.

Since June, writes Ranson, the price of gold has been rebounding and metals prices have also begun to climb.

Source: R. David Ranson, "Commodity Prices Follow Gold -- A Leading Indicator of Inflation," National Center for Policy Analysis, March 6, 2014.


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