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Shrinking GDP Boosts Gold

Written By Brian Hicks

Posted January 31, 2013

The U.S. economy contracted abruptly in the fourth quarter, something that will undoubtedly further delay any real recovery. This news could make it difficult for investors to exercise faith in the markets and for consumers to increase their spending. Gold, however, is likely to enjoy a good ride for quite some time as a result.

According to the Commerce Department on Wednesday, GDP dropped by 0.1 percent, which makes it the economy’s worst performance since 2009.

Slower than usual inventory growth and deep cuts in defense spending, as well as the impact of Hurricane Sandy, all contributed to lowering the growth rate.

Reuters explains that as everything went into a holding pattern in the months prior to the fiscal cliff, businesses either stopped buying new inventory stock or slowed down drastically. That alone led to GDP growth rates falling by 1.27 percentage points.

And with the nation’s international wars drawing down to a close, defense spending went down steeply.

But all this, of course, is good news for gold, which was up nicely after the above news emerged.

Bloomberg reports:

“Clearly with the negative GDP, we’re seeing a flight to safety,” Tim Evans, the chief market strategist at Long Leaf Trading Group in Chicago, said in a telephone interview. “Growth has been fairly stable in recent quarters, but if we see more numbers like this, gold is going to have a good run.”

Gold futures for April were up 1.1 percent to $1,681.60/oz on the New York Comex yesterday afternoon, with prices going up by almost 1.3 percent following the Fed’s revelation that it would maintain security purchases of $85 billion a month.