The U.S. economic growth slowed in the final three months of 2014 to a 2.6 percent rate, down from 4.6 percent in the second quarter and 5 percent in the third quarter, according to the Bureau of Economic Analysis. On the surface, a 2.6 percent rate in the last quarter and 2.4 percent for the whole year is quite well compared to other economies. However, economists had expected GDP to expand at a 3 percent rate in the fourth quarter. This is probably why gold futures regained ground (the gold contract for April delivery rose 1.86 percent) on GDP data.

Why was the GDP growth lower than in the third quarter? There are three main reasons. First, military spending declined at a 12.5 percent annual rate compared to a 16 percent surge in the previous quarter. Such a plunge subtracted 0.58 percentage points from growth in the quarter.

Second, strong dollar caused a rise in imports, which is a subtraction in the calculation of GDP. Therefore, after adding 0.78 percentage points to growth in the third quarter, net exports subtracted 1.02 percentage points from growth in the fourth quarter. Although the methodology of calculation of GDP considers import a negative factor, the fact that people can buy more goods and services from abroad is hardly detrimental to the economy.

The most important is the third factor, i.e. weak investment spending. Non-residential investment rose at just 0.24 percent compared to 1.1 percent in the third quarter, while equipment investment actually fell 0.11 percent (compared to 0.63 percent growth in the third quarter). There is nothing sure; however this weakness could reflect problems in the oil industry. On Friday, we wrote about the layoffs that had begun in some shale states. It is also possible that oil producers cut or delayed some investment projects. Therefore, if the oil price remains at the current low level, we should expect an even bigger drop in capital expenditure. Please take notice that capital expenditure usually lags price changes, because entrepreneurs want to make sure that variations in price are not only temporary.

On the other hand, we observed the strong pace of consumer spending in the fourth quarter. However, it is not consumption that drives the economy, but investment. Therefore, although GDP may rise in the next quarters on positive consumer spending (however, the jumps in gasoline consumption and high car sales will probably not be repeated), the long-term economic prospects are not so “strong” as the Fed believes. This is, of course, good news for gold investors.

Summing up, it still seems that the long-term outlook for gold remains bullish based on the fundamental factors and the above-mentioned statistics don't change that.

Arkadiusz Sieron
Sunshine Profits‘ Market Overview Editor

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