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The price of GLD continues to fall. The recovery of the U.S. economy keeps raising the odds of a rate hike in December, which pressures down GLD. This week’s GDP and PCE reports will provide additional insight into the direction of the U.S. economy and could indirectly move the price of the fund. The weakness in the gold market has also kept down the shares of the SPDR Gold Trust ETF (NYSEARCA: GLD ). As the U.S. economy keeps showing signs of slow progress, the market raises the odds of a December rate hike. And this trend keeps pushing down the price of GLD. This week’s GDP and PCE will provide additional information about the direction of the U.S. economy. Additional strong results could drive GLD further down. This week, the second estimate of the U.S. GDP for Q3 will be released. In the first estimate, the GDP growth rate was only 1.5%, which was much lower than that in Q2. In terms of market reaction, even though the financial markets do tend to react to the progress of the U.S. GDP, the price of GLD doesn’t seem, as presented in the following chart, to have a consistent impact from the changes in GDP. (click to enlarge) (Source: BEA, Google Finance) The chart presents the relation, or lack of it, between the percent change in the price of GLD on the day the GDP report comes out and the “surprise” in the headline figure of the GDP annual growth rate – a positive percentage point indicates a better-than-expected growth rate. The dots don’t show a clear upward or downward trend to suggest a correction. The GDP growth rate tends to coincide with the movement of the U.S. dollar. And the latter also has a mid-strong correlation with the price of GLD – as the U.S. dollar rises, GLD tends to fall. But directly, GLD doesn’t seem to react in a more consistent way to the surprises of GDP’s headline figure. How about the relation over the long run? Although the slow recovery of the U.S. economy may have contributed, at least indirectly, to the decline in the price of gold, when you look at the two data series over the past decade, it’s hard to see any correlation as well. (click to enlarge) (Source: FRED ) These charts suggest that the progress of U.S. dollar, changes in long-term yields, the concerns over rising inflation and even, to a lesser extent, changes in the supply of gold are likely to be the main direct factors moving GLD. Does this mean the GDP report doesn’t matter? I don’t think so, especially at this stage when the FOMC contemplates whether or not to raise rates. After all, the market estimates that the chances for a rate hike next month by the FOMC are 74%. At the beginning of the month, these odds were lower than 50%. As the chances continue to climb, GLD tends to fall. It’s true that the Fed’s dual mandate refers to employment and price stability, not growth. These two targets are related to the GDP growth rate. And if GDP doesn’t rise, the Fed will be less incline to raise rates. Currently, the market expects GDP growth to come in higher than the first estimate of 2%. Any higher figure could indicate the U.S. economy is doing better than was previously estimated – another positive sign that could keep GLD prices down. It’s also worth noticing the components of the GDP report, such as changes in inventories, investments and personal spending. This week, we also have the PCE report – another indicator for the progress of U.S. inflation. In the past report, the core PCE stood at 1.3% year on year (as of September). The Fed’s annual outlook was 1.4% . If the core PCE doesn’t start to pick up, the Fed expects next year’s core PCE will rise to 1.7%. This may not delay the Fed from raising rates in December, but rather, it may maintain a very gradual rate hike pace next year, which will actually keep interest rates low and GLD from crashing. The price of GLD is still likely to further slowly decline. This week’s reports will provide additional information about the progress of the U.S. economy. As the U.S. dollar and long-term interest rates continue to climb, the downward pressure on GLD will intensify. It doesn’t mean the fund couldn’t experience short-term rallies – especially if the risk in the financial markets rises or the U.S. economy doesn’t progress or U.S. dollar changes course again and depreciates, just to name a few factors. But these short-term rallies aren’t likely, for now, to change the fact of the descent of GLD. For more please see ” GLD Continues to lose its appeal ” Scalper1 News
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