Today, a second estimate of GDP for the first quarter, based on more complete data, will be released. What can we expect from the revision and how can it affect the gold market?

The U.S. Q1 GDP is expected to be revised down to -1 percent (MarketWatch’s consensus) from 0.2 percent, as data available since the first estimate has showed a much deeper slowdown than anticipated. Especially, the March trade deficit was much worse than expected (imports subtracts from GDP). The actual trade deficit was -$51.4 billion, much more than the range of estimates of -$45.0 billion to -$37.8 billion.

Of course, the revision will affect the gold market only if it is significantly different from the forecasts. However, the contraction of GDP in the first quarter may be important from a psychological point of view, as it will make U.S. falling into recession more likely, as the technical indicator of a recession is two consecutive quarters of negative economic growth. Although the GDPNow model forecast for real GDP growth in the second quarter of 2015 is 0.8 percent so far, it may be lowered even further, as it was the case in the first quarter.

Investors should be prepared that many analysts and the Fed officials may belittle the weak GDP numbers, which could weaken the positive reaction in the gold market. We have already written that economic growth was sluggish due to temporary factors. But now the phrase of the day is “residual seasonality”. What does it mean? In short, some analysts have suggested that the reported weakness in first-quarter growth may have been a statistical anomaly. You are right – the BEA seasonally adjusts GDP data to remove such fluctuations. However, you see, single adjustments may not be enough to remove persistent weak first-quarter growth and boost GDP to justify hiking interest rates by the Fed. Therefore, the BEA will make some necessary alterations in seasonal adjustments methods. The changes will be implemented with the release of the initial second-quarter GDP estimate on July 30, just before September… The potential for upward revision is quite large, as the Federal Reserve Bank of San Francisco has found that “the application of second-round seasonal adjustment increases real GDP growth in the first quarter of 2015 from its initial published value of 0.2% to 1.8%”. It is a bit funny, because the other part of the Fed, i.e. the Board of Governors, has found: “we find no firm evidence that this pattern primarily reflects residual seasonality. Instead, the first-quarter weakness appears to be driven by a couple of outlier years and by soft readings in a varying subset of underlying components”.

The key takeaway is that U.S. Q1 GDP growth is to be revised down to around -1 percent from 0.2 percent, signaling a more important economic slowdown and making a recession more likely to happen this year. Given gold’s safe-haven nature and lack of correlation with other financial assets, this should be good news for the yellow metal. However, economic pundits talking about residual seasonality and the never-ending statistical modifications of the GDP numbers may create an illusion of faster economic growth and put some downward pressure on the gold prices.

Thank you.

Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor

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