As I wrote earlier this month, the economic recovery in the U.S. is an illusion. The truth was revealed past Wednesday, when it turned out that the U.S. GDP growth was only a meager 0.2% on an annual basis. Analysts expected the U.S. economy to grow by 2.1%, but it has stagnated instead. What you don’t read elsewhere is that U.S. GDP would have declined by 0.6% if it were not for one alarming development.

The gross national product (GDP) is partially of a quantitative nature given its nominal size. Currently, U.S. GDP amounts to about $11,170 billion.

However, there are also quantitative dimensions; the qualitative growth of GDP can be either high or low, regardless of its growth in nominal terms. And this qualitative growth just happens to have been dreadful in the past quarter.

What am I talking about?

Business inventory levels have increased.

And if it wasn’t for the growth in business inventories, the U.S. economy would have declined by 0.6% instead of grown by 0.2%.

Even the Bureau of Economic Analysis (BEA) — responsible for U.S. GDP estimates — believes that an ‘’unanticipated buildup in inventories’’ is an indication of economic slowdown. (See: BEA's own website).

So what is the significance of a buildup in business inventories?

Lacking more detailed information, there are two possible scenarios. Number one: the buildup in business inventories means that it is difficult to find buyers for finished products (a bad sign). Or number two: the buildup in business inventories means that producers are hoarding semi-finished products and materials in anticipation of a growing demand (a good sign).

Fortunately, we have another piece of information to solve our puzzle. And as Jim Rogers once stated: ‘’it [investing] is a 3 dimensional puzzle and the pieces are always changing.’’

The missing piece of information are the current market prices of commodities.

You see, if the buildup of business inventories was the result of businesses hoarding materials, this should be reflected in the market prices of commodities. It would mean that we should observe a tendency for silver, oil, gas, copper, corn, pewter, nickel, platinum, cotton, and rubber prices to rise. In reality, the opposite is happening.

My preliminary conclusion it therefore that the buildup in business inventories of the past quarter — and the quarter before that — are an indication of an economy-wide decline of demand.

Following Wednesday’s GDP growth publication, precious metal prices have declined strongly. On Thursday, silver dropped by almost 5% and gold dropped by several percentage points.

Many of you have called me to ask why the gold price is declining. This question was often followed by the remark that ‘’the U.S. economy is slowing down after all! Doesn’t this mean that the Fed will postpone raising interest rates?’’

Nothing could be further from the truth.

The Federal Reserve has indicated that it interprets the disappointing GDP statistics as a temporary setback. It blames the ‘’bad weather’’ for causing them; a ‘’temporary factor’’ in their terminology.

This rationalization of disappointing GDP statistics is of course nothing new. Since the 2008 recession, all kinds of rationalizations have been used to explain disappointing statistics, while all positive figures have been interpreted as ‘’confirming the recovery.’’

Because of this, the reality is that the Federal Reserve is still on track to raise interest rates in June.

For everyone who looks at the statistics and the FOMC minutes of past Wednesday, it should be clear that the Fed is burying its head in the sand. Consider for example the Fed’s remarks on consumer confidence.

The Fed indicated to investors that ‘’consumer sentiment remains high.’’

The only problem is that in the meantime the consumer sentiment index has dropped from 101.3 to 95.2, while analysts expected an increase to 103 (data obtained via Bloomberg). Consumer confidence has not ‘’remained high,’’ but is fragile instead.

In short, the Fed is making an assertion that can be disproven by simply looking at the data which is publically available to every layman. The Federal Reserve is burying its head in the sand and that is why the gold price continues to decline.

Moreover, to what extent are disappointing statistics that may appear before the Fed’s policy decision of June even relevant? After all, economic weaknesses are simply rationalized as ‘’temporary factors.’’ As long as long as the Federal Reserve continues to pretend that the U.S. economy is recovering, the gold price will continue to decline. But at some point, the truth can no longer be denied by anyone and the Fed’s credibility will deteriorate even further.

And that’s exactly why the gold price is about to bottom (in dollars). Earlier this year, I wrote that can realistically expect a drop to $1.100/oz. We are probably now moving towards that level. The same applies to silver, which may drop to $15/oz (another bottom).