Gold Resilient in the Face of Stronger Than Expected GDP Print

Gold Resilient in the Face of Stronger Than Expected GDP Print

Gold remains consolidative, but resilient, in the face of this morning’s Q3 GDP beat and the corresponding rise in rate hike expectations. Markets in general seem nonplussed; there was a time not so long ago that a print like that would have sent the yellow metal at least $15-$20 lower. Perhaps a December rate hike is truly baked into the cake.

Advanced Q3 GDP came in at 2.9%, on expectations of +2.5%. This may in fact give the Fed the cover they need to pull the trigger in December. The FOMC will meet next week, and while we’ve been told that the November meeting is “live”, it is unlikely they will do anything in the week before the Presidential election. With the probability for a November hike at less than 10%, the Fed will not look to surprise and roil markets.

There are many articles this morning expressing optimism about the uptick in growth. Let’s remember though that we’ve seen even higher prints going back to the end of the Great Recession and each has proven to be unsustainable. In Q2-15, GDP came in at 2.6% and was followed by 2.0% in Q3 of that year. The Fed hiked in December and we saw sub-1% growth in both Q4-15 and Q1-16. Maybe cautious optimism should be the order of the day.

source: Behind the headline number, slower consumption is one reason for that caution. Personal consumption slowed to 1.47% in Q3, down from 2.88% in Q2. Real consumer spending rose 2.1%, below expectations of 2.6% and well below the 4.3% print in Q2. It was a rise in exports and inventory building that primarily contributed to today’s beat.

Again, I’m impressed with gold’s resilience in the face of better than expected economic data and the recent strength in the dollar. However, it’s worth noting that the dollar index is trading lower on the day and didn’t really see any intraday buying after the GDP number came out.

Maybe, just like last year, a rate hike is exactly what this market needs to trigger a breakout of the recent range. Last December, the Fed’s 25 bps hike marked the low of the move and gold rallied nearly 30% on the expectation that it would be a long time until we saw the next hike.

That proved to be true; as it looks like a full year will have passed between rate hikes. If this is the pace we can expect moving forward, it will be 2027 before rates are “normalized.” However, the odds of an 18-year uninterrupted recovery are slim to none.


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