The Citi U.S. Macro Economic Index has recently plunged. What does it imply for the gold market?

The chart presented below has recently gained popularity. As one can see, the U.S. economic data has recently disappointed expectations. The U.S. Economic Surprise Index plunged in June to its lowest level since August 2011.

(Click on image to enlarge)

The index measures how actual data readings compare with expectations. A reading above zero means that the data beats expectations on balance, while a negative reading indicates that hard economic data disappoints expectations. We are now at about -80, a collapse of almost 140 points since April. No wonder some analysts are afraid of the upcoming recession or stock market crash. Indeed, there are some reasons to worry, and some analysts were clearly too optimistic about the so-called Trump trade. If the stock market follows negative economic news, gold should shine.

However, we may look at the presented chart from a completely different perspective. Since the index is mean reversing (expectations eventually convert to reality), we could see the rebound in the near future. In other words, the index is likely to come back, as it has a natural pull towards zero. Indeed, the Citi U.S. Economic Surprise Index is now at a level where it usually picked up over the past couple of years (while the Citi Eurozone Economic Surprise Index is at very high level right now). The rebound of the index would not be a positive scenario for the yellow metal, as data beating expectations would strengthen the U.S. dollar, gold’s major antagonist.

To sum up, the Citi U.S. Economic Surprise Index fell in June to multi-year low. Although it might seem as worrisome (and indeed there are many justified reasons for anxiety), investors should not be too excited about the plunge – it creates potential for a rebound, which would not be positive for the gold market.