Zero Growth In Q1 2016 And Gold

On Friday, the GDPNow model forecast of real GDP growth for the first quarter of 2016 decreased to 0.1 percent from 0.4 percent. What does it mean for the gold market?

The U.S. economy continues to slow down. In the second quarter of 2015, the U.S. economy rose at an annual rate of 3.9 percent versus – 2.0 percent in the third quarter, and – 1.4 percent in the fourth quarter. The last estimate of the Federal Reserve Bank of Atlanta forecasts essentially no growth in the first quarter of the 2016 (0.1 percent, to be precise). The reduction in the forecast came after Friday’s release of the February wholesale trade report by the U.S. Bureau of the Census. U.S. wholesale inventories declined by 0.5 percent in February, following a 0.2 percent decline in January (revised down from a 0.3 percent increase). The decline in inventories means that companies have cut back on production to get inventories in line and avoid an excess buildup. Although the drop in excess inventory is necessary in the long-term (the inventory-to-sales ratio remains very high), it implies weaker growth (i.e., the current production) in the short-term. Interestingly, the Federal Reserve of New York has just introduced its own Nowcasting Report, which is more optimistic than the Atlanta’s GDPNow and forecasts 1.1 percent growth in the first quarter of the 2016. The introduction of the more bullish nowcasting report may be negative for the price of gold.

The take-home message is that the forecast of US GDP growth for the first quarter of 2016 decreased to just 0.1 percent. This is good news for gold bulls, as the price of the bullion is often negative linked to U.S. GDP growth. The yellow metal is a non-confidence vote in the US economy, therefore the slashed expectations of economic growth should increase the safe-haven demand for gold. The next GDPNow is set to release today – if US GDP growth decrease further, gold will shine. Conversely, if U.S. GDP growth accelerates, gold will be under pressure.

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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.

Arkadiusz Sieron

Sunshine Profits‘ Gold News Monitor and Market Overview Editor