U.S. Economy and Precious Metals Review - For the Week Ending on November 2nd 2007
U.S. Economy and Precious Metals Review – For the Week Ending on November 2nd 2007
U.S. Economic malaise helped to make precious metals very attractive across the board last week. We observed positive percentage increases in closing prices. Friday’s close for spot gold stood at $806 USD. The point of reference that has been in the news was the posting on January 21st 1980, where the nominal spot gold price was $825 and the nominal futures price was $875. Translated into October 2007 U.S. dollars, this would give us a real spot price of $2,201.33 and a real futures price of $2,333.33. Clearly, things are not the same in real terms.
Table 1 below gives us an overview of of last week’s performance of gold, platinum, palladium, and silver. After adjusting the prices in real terms, the largest annual real gains in the AM and PM fixings were found in platinum and gold. Last week, every metal posted its lowest price on Tuesday, October 30th, the same day that consumer confidence was revealed to be 2.9 points lower than forecasted as well as the day when the Federal Open Market Committee began their meeting that would determine the future discount and federal funds rates.
On the following day, October 31st, the announcement of the discount and federal funds rate cut of 25 basis points was made and all metals prices gained new ground in its closing price, as the reduction in rates sparked inflationary concerns. This coupled with rising energy prices provided investors with signals of enhanced inflationary pressures. WTI crude oil price grew at 2.6% last week. In addition, the reality of a reduction in consumer confidence as well as the declining value of the dollar gave market participants another reason to buy into the metals. A review of the U.S. economic statistics that came in last week is provided in the next section.
Lastly, all metals posted their highest closing price this past Friday, November 2nd. Last week, gold increased by 3.17%, platinum increased by 1.25%, palladium increased by 1.9%, and silver increased by 2.4%.
II. U.S. Economic Statistical Update
There was solid economic growth in the third quarter of 20071.. The advanced annual percentage increase in real GDP was recorded at 3.9%, up 3.3 percentage points from the first quarter of this year as shown in Table 2. This does not suggest that worries surrounding the housing correction are a thing of the past, as an expected slowdown of economic expansion is likely in the near term. Furthermore, it is hoped that the overall 75 basis point reduction of the federal funds rate from September to October 2007 will be enough to prevent an economic downturn brought on by this year’s disruptions to the financial markets. The federal funds rate is currently set at an annual average of 4.5% while the discount rate is set at 5%, see Table 3.
Money supply, as measured by M2, increased last week at an annual rate of 6.5% while the value of the dollar fell by 0.53 points on the Broad Dollar Index. Inflation is in check at an annualized monthly rate that is less than 3%, as measured by the GDP-Deflator, PCE Price Index, and the CPI-U. Please note that the CPI-U and the PCE Price Index include food and energy unless specified as core inflation in which case it would be measured by the CPI-U or the PCE Index less food and energy. Furthermore, the term ‘in check’ implies that growth in the price level is continuously being monitored and is not seen as being ‘out of control’. The annual rate stands within the levels of 2 - 3%. Pressure in the price level should come from increased energy prices as well as from the reduction in the interest rates, which makes consuming today more attractive than before the rate reduction. In this case, more dollars will be out in circulation within the economy.
Job growth is still strong. The unemployment rate was reported at 4.7% for October of 2007. It was unchanged from the previous month and had increased by 0.3 percentage points from a year before. In addition, more good news arrived last week from the Challenger Job Cut Report, unemployment insurance weekly claims, and changes in personal income. Job cuts were reduced by 8,625. Advanced estimates for unemployment insurance claims indicate that they had fallen by 2,000 from the year prior. Personal income had increased by 0.4% from the previous month and by 6.83% from September 2006.
Contrary to this news is the fall in the Consumer Confidence Index. It posted 95.6 last month, 2.9 points less than analyst had forecasted for the month of October. Furthermore, it fell by 12.1 points during the third quarter of this year, resulting from the impact of the housing crisis. A reduction in the index indicates to us a reduction in consumers’ willingness to spend. From the national account’s identity, consumer expenditure plays a large role in determining national income, the main gauge by which we determine whether an economy is in or out of a recession.
Again, the details of the data presented should tell us that the U.S. economy is not in the clear and that it still suffers from both financial and psychological malaise.
This wraps up my review of the U.S. economic and precious metals data that was reined in last week. I hope to return to this topic and provide you with an update.
Until next time, take care and I wish you all a really great week,
1. The third quarter, representing the months of July, August, and September, is noted as Q3 in this review. From this, it also follows that Q1, Q2, and Q4 refer to the first, second, and fourth quarter respectively.
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