Gold Futures Are Above $1800 as the U.S. Economy Slows and Inflation Increases

After posting an extremely robust GDP of 6.7% in the second quarter, analysts polled by the Wall Street Journal predicted that the GDP for the third quarter would show a significant contraction in the economic recovery. The forecast indicated that economic growth would slow down and that the GDP would come in around 2.8%. However, according to a government report released today, the third quarter GDP contracted even more than predicted.

The Bureau of Economic Analysis, a part of the U.S. Department of Commerce, released the following statement,

“Real gross domestic product (GDP) increased at an annual rate of 2.0 percent in the third quarter of 2021, following an increase of 6.7 percent in the second quarter. A slowdown led to the deceleration in real GDP in the third quarter in consumer spending. A resurgence of COVID-19 cases resulted in new restrictions and delays in reopening establishments in some parts of the country. In the third quarter, government assistance payments in the form of forgivable loans to businesses, grants to state and local governments, and social benefits to households all decreased.”

A GDP of 2% for the third quarter is a 4.7% contraction of the economic recovery when compared to the second quarter. The report showed that the United States had the slowest economic growth since the onset of the 2020 recession.

With rising inflation reaching its highest level since 2009 coupled with the lowest economic growth rate since the onset of the recession, the Federal Reserve will face the worst possible economic scenario when it meets next week for their November FOMC meeting. This will force the hand of the Fed as it pertains to the current extremely accommodating monetary policy with the Fed’s funds rate between 0% and ¼%.

The original forecast by the Fed during the onset of the recession in 2020 projected no interest rate hikes (lift-off) for 2020, 2021, and 2022. The Federal Reserve recently updated its interest rate projections penciling in the possibility for one or two rate hikes in 2022. A combination of high inflation and a slowing economy will make it extremely difficult for the Fed to raise interest rates next year. If the Federal Reserve’s decisions are truly “data-dependent,” it would not be surprising to see them backpedal on their recent decision to accelerate their timeline for interest rate normalization. It could also slow down the tapering of their monthly asset purchases.

Today gold futures once again closed above $1800 per ounce, the second time this week, which was the first-time gold breached this psychological level since September 14. As of 5:41 PM, EDT gold futures are currently fixed at $1800.60 after factoring in today’s fractional increase of $1.80.

More importantly, the combination of rising inflation and a contracting economy will make it difficult, if not impossible for the Federal Reserve to become more hawkish in regards to lift-off and even tapering.

It is for that reason that we currently believe that there is no technical resistance until $1836. This is based upon the top that occurred on September 6. Today’s release of the third-quarter GDP could move gold above $1836. We have raised our short-term forecast. Our new major resistance target is at $1920, the high achieved at the beginning of August this year. We could see gold trade above $1900 for the first time since August.

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Wishing you, as always, good trading and good health,

Gary Wagner