The Devil in the Details of Friday’s GDP Report

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.