The Daily Market Report: Gold Defensive at Low End of Range


USAGOLD/Peter Grant/12-06-17

Gold is consolidating at the low end of the range. While the yellow metal did set a new 4-month low yesterday, the breach of support was just by a dime.

The market is now awaiting developments on the government funding front, which has reportedly met some opposition from conservative Republicans. In addition, the opposing sides of aisle continue to spar over the inclusion of DACA. Republicans are saying there is no way DACA will be in a funding bill, while Democrats are saying they will not vote for any legislation without it. Tick-tock; the government faces a shutdown on Friday.

One thing is for certain, the debt ceiling is going to have to be raised (or suspended). That is a fact both as a prerequisite to any new funding and to accommodate whatever version of tax reform ultimately gets signed into law.

It is widely conceded that the tax cuts will reduce federal revenue by $1.3 trillion to $2.0 trillion over 10-years. Even when scored dynamically — taking into consideration expectations for higher growth — revenue is expected to fall by $0.5 trillion to $1.7 trillion. That’s going to require more borrowing, resulting in a higher national debt.

There seems to be some skepticism about the magnitude of GDP growth attributable to the tax plan. Ongoing flattening of the yield curve actually portends recession.

That’s likely to be a topic of conversation at the FOMC meeting next week. Additionally, today’s revisions to Q3 productivity are troubling; particularly the negative revision to unit labor costs. Q3 ULCs were revised to -0.2%, from +0.5% previously and -1.2% in Q2 (was 0.3%). Real compensation declined 1.1% y/y, the fourth consecutive quarterly decline.

These data undermine the hopes that compensation was on the rise and would have a positive impact on inflation. This is something else the Fed is going to have to rationalize if they really intend to hike rates next week. It looks like below target inflation is going to remain “transitory” for a while longer.

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