The Devil in the Details of Friday’s GDP Report

The Market Gage - Dillon Gage's Precious Metals Newsletter

The third quarter Gross Domestic Product number released on Friday shows that the U.S. economy grew at its fasted pace in two years. Economists were looking for at 2.5 percent gain and the report showed a hefty 2.9 percent gain.

Sounds wonderful, right?

Well don’t get too excited, here’s why. If you ever heard the term, “the devil is in the details,”
here are some of the components that make up that number.

In my opinion two factors make this number somewhat irrelevant. Soybean exports helped reduce the trade deficit in the third quarter. It was such a significant possible “one off” detail, that it had a .83 percent impact on the GDP number. The reason was due to the poor output on soybean exports in Brazil and Argentina this quarter, someone had to make up the difference. So the U.S. stepped up due to our record bumper crop this year and strong demand from China. The other significant contributor was that businesses have increased inventories for the holiday season after maintaining very low inventories during the first two quarters due to slow demand.

Increasing inventories had a .61 percent impact on the GDP number. So to add the two and get the real number which should be 1.46 percent. Not too impressive as both of these instances have the smell of a “one off” item.

Nonetheless, this was great fuel for the hawks on the Federal Reserve to argue that a rate hike is in order at the December FOMC meeting. Current odds for a rate hike in November according to the CME Watch tool is 6 percent chance and 73 percent chance for December.

What I find interesting over the past few weeks is that with the dollar index flexing its muscle and trading up to a figure of 99, the price of gold has been has been digging her heals in the ground building levels of support above the $1,260 area.

One old Wall Street gold trader who has been out of the market for a while due to the lack of volatility said, “one would think after this strong GDP figure and higher odds of a rate hike in December, gold would be under pressure, but that’s just not the case.”

True, most Wall Street traders I spoke with who recently have indicated a lack of interest in taking on any positions in a market that trades sideways, are poised to get back in a soon as the gold market shows some life and direction.

The question I ask myself is, with a much stronger dollar and the almost certain rate hike in December, why is the price of gold holding up so well? Is it the continued ETF demand or demand for the physical metal in countries with negative interest rates that are supporting the steady price of gold?

Only time will tell.

Have a wonderful Monday.

Disclaimer: This editorial has been prepared by Walter Pehowich of Dillon Gage Metals. This document is for information and thought-provoking purposes only and does not purport to predict or forecast actual results. It is not, and should not be regarded as investment advice or as a recommendation regarding any particular security, commodity or course of action. Opinions expressed herein are current opinions as of the date appearing in this editorial only and are subject to change without notice and cannot be attributable to Dillon Gage. Reasonable people may disagree about the opinions expressed herein. In the event any of the assumptions used herein do not come to fruition, results are likely to vary substantially. All investments entail risks. There is no guarantee that investment strategies will achieve the desired results under all market conditions and each investor should evaluate its ability to invest for a long term especially during periods of a market downturn. No part of this editorial may be reproduced in any manner, in whole or in part, without the prior written permission of Dillon Gage Metals. This information is provided with the understanding that with respect to the opinions provided herein, that you will make your own independent decision with respect to any course of action in connection herewith and as to whether such course of action is appropriate or proper based on your own judgment, and that you are capable of understanding and assessing the merits of a course of action. You may not rely on the statements contained herein. Dillon Gage Metals shall not have any liability for any damages of any kind whatsoever relating to this editorial. You should consult your advisors with respect to these areas. By posting this editorial, you acknowledge, understand and accept this disclaimer.