Metals futures pare gains after GDP falls

In the Lead

The final trading session of the week opened higher in metals as participants continued to bet that Mr. Draghi’s words will translate into action and that the GDP numbers will be the final motivating factor for the Fed to take action next week. Spot gold opened at $1,630 and silver at $27.79 on the bid-side. Platinum held above the $1,400 level with a gain of $12 to $1,413 and palladium advanced $5 to $575 per ounce. Crude oil rose 33 cents but copper picked up 1.4%. The euro cleared the $1.23 level while the US dollar slipped 0.23 to 82.64 on the index.

Economists expected US GDP to come in at the 1.3% level for the second quarter but at the same time they anticipated that the BEA would revise previous data of this type upwards for last year. A number of metrics that have been available could lead to such re-writing of economic history; among them,  the fact that more jobs were created last year than previously estimated, and that gross domestic income outperformed gross domestic product. In fact, GDI is projected to have grown at a rate of 2.8% for the first 11 months of last year as compared to the 2.4% growth rate that was tallied for GDP.

The actual figure for second quarter US GDP came in at 1.5%. That was above the previously mentioned consensus but it was still a decline from the previous trimester’s 1.9% rate of expansion. Gold futures immediately pared their initial gains in the wake of the GDP number and threatened to turn flat-to-negative on the day. That’s what we mean by how closely intertwined the market is and has been when it comes to emotions and speculation surrounding the Fed and its on-again off-again QE hand-outs. But, fear not, there still next week.

Of course, now, with the Fed meeting coming up, the crystal ball-gazing has once again resulted in the predictions that the US central bank will finally give the markets something to ‘bite’ into and run away with risk-taking as a result. Most of the shop talk among traders is indicative of them sensing that the Fed will perhaps offer to buy some mortgage-backed securities and/or that it will extend its rate guidance language to cover not only 2014 but some portion of 2015 as well. How much such possible action might boost gold or the Dow or oil remains to be seen, but there are several schools of thought that see the Fed’s final ‘give’ as turning out to be…a dud. Here is why:

While earlier versions of QE did have an impact on mortgage rates, today, the banks appear reluctant to increase capacity and thus the effects of lower rates might not be properly shared with the borrowing public. In addition, one of the principal aims of QE programs has been to induce the public to buy stocks and other risk assets. However, today, with the investing public on a large-scale global quest for yield, additional QE is unnecessary.

CNN Money notes that “some argue that with rates already hovering near zero, any action by the Fed will have little to no effect on the economy. “The biggest risk is, it doesn't work, and the market concludes the Fed is losing its impact." said Eric Lascelles, chief economist for RBC Global Asset Management. In addition to more asset purchases, Bernanke has laid out a few other options for stimulus, but those too could have limited results. We shall see what kind of a day, good or bad, August 1st turns out to be.

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