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Friday, October 27, 2006

How Will GDP Numbers Affect Commodities?

US gross domestic product is slowing, and that will have an impact on metal prices ...

From Marketwatch: U.S. economic growth slowed sharply in the third quarter, increasing at a real seasonally adjusted annual rate of 1.6% after a 2.6% increase in the second quarter, the Commerce Department said Friday.
The gross domestic product was below the 2% growth rate expected by economists polled in the MarketWatch survey. It was the slowest since the first three months of 2003.
The economy has grown 2.9% in the past year, the slowest year-over-year growth in three years.
Also, there was news that the personal consumption expenditure price index -- an inflation gauge that is a favorite of the Fed -- increased at 2.5%, down from 4% in the second quarter. While that is above the Fed's 1.5% to 2% comfort level, the Fed has made a lot of noise about the fact that the velocity of the numbers is more important than the numbers themselves.

So what does this mean? It probably takes another Fed rate hike off the table in the forseeable future. It also means that rate CUTS in the first quarter are back on the table. This should be very good for gold, which is seen as an inflation hedge.

It could also weigh on copper, zinc, and other metals in the short-term, because these are industrial metals and investors will fear these GDP numbers mean a slowdown. But I have shown you plenty of numbers that indicate the global economy is NOT slowing down -- not yet anyway. So I think a pullback in industrial metals will be shortlived.

Meanwhile, we're already seeing domestic oil and gas consumption creep up. That might have something to do with the fact that short-memoried consumers are buying more large trucks and SUVs now that gasoline prices are cheaper, but that is also contrary to fears of a slowdown.

This line from Marketwatch sums it up pretty well: "Economists said the Fed is watching closely to see whether the slowdown gathers momentum or if the third quarter was the pause that refreshes growth."

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