It is now becoming very hard to deny that US real estate prices got ahead of themselves, or that the slowdown in the real estate market is causing drag for the US economy. It should therefore be just be a matter of time before base metal prices and the gold price decouple.

Third quarter economic growth in the United States was the lowest in three years and it was a direct result of the downturn in the real estate market. Annualized GDP growth was only 1.6% from July to September, compared to 2.6% in the second quarter and 5.6% in the first quarter, and while I was editing this letter I saw an article on Bloomberg that suggested GDP growth for last quarter may have been overstated by as much as 0.7%, meaning the actual growth was an anemic 0.9%. Most sectors of the economy posted positive growth, except residential fixed investment, which includes spending on housing, and which fell by 17.4%. This was the sharpest decline in residential investment since 1991 and reduced overall GDP by 1.12%.

A headline in the Wall Street Journal on Thursday read: "New-Home Sales Jumped 5.3% Last Month as Prices Plunged." One could assume from such a headline that the real estate market might be turning around. However, that increase in new home sales is based on seasonally adjusted figures. Based on unadjusted numbers, there was a 2.3% decline in new home sales from August to September.

Because of changing weather and consequent changing buying patterns, it is not always useful to compare month-to-month data, which is why the data is adjusted for seasonality. But given the state of the market I would not put too much emphasis on a seasonally adjusted figure either, since the market is currently quite volatile. So let's look at some other data.

Sales of previously owned homes were down 1.9% from August on a seasonally adjusted basis, which, as I mentioned can be misleading. On a year-to-year basis (a better gauge under the current circumstances) September existing home sales were down 14.2% in September.

Home prices are also falling: The average price of a new home decreased by 6.6% from August to September and the median home price fell 9.7% year-over-year. The latter is the largest decline in home prices since 1970.

As I have mentioned before, I think the decline in the real estate market is going to have a profound impact on US economic growth, but we have not seen it yet. The decline thus far is only the beginning. Thus far the impact on GDP has been mainly a direct result of reduced spending on housing; wait for the ripple effect to flow through -- that's what is really going to hurt.

It has started, but has not matured. In the meantime the media continues to try and put a positive spin on things. "Durable Goods Demand Surges", we are lead to believe. But on further analysis this, too, seems overly optimistic. Overall durable goods orders increased by 7.8% last month but, when you look at the data, the increase seems to have come predominantly from a 183% increase in non-defense aircraft and parts. Aircraft orders are notoriously volatile because the items are so expensive. Excluding transportation, durable goods orders rose only 0.1% in September (from August) and shipments declined by 2.2%. The Institute of Supply Management said its index of manufacturing activity declined 2.9% from August to September.

Consumer spending accounts for 70% of US GDP and direct residential investment accounts for another 5% to 6%. Consumers, in total, therefore account for at least 75% of US economic activity, and it is the momentum of consumer spending that is still keeping the economy growing. With real estate prices and sales declining, I would not want to bet that consumer spending is going to keep on growing.

McGraw-Hill Construction is forecasting the first decline in overall construction since 1991 due to a 5% anticipated decline in construction of single-family homes. But the company also forecasts a 3% decline in construction of shopping centers since these are closely tied to residential construction.

David Seiders, the chief economist of the National Association of Home Builders expects prices for single-family homes to continue to decline next year due to over-building, prices that have outpaced incomes, and rising inventories of unsold homes. The Association expects that the imbalance between supply and demand has, and will continue to have, a negative impact on homebuilders. During the second quarter, the annual rate of single-family home starts fell 41.2% and, according to Mr. Seiders, permits are in "free fall".

The construction industry (not just residential) accounts for almost 10% of US economic activity and its contraction will also have an impact since it is a major buyer of products and generator of employment.

Faced with the above, the Federal Reserve decided to leave interest rates unchanged. My guess is that the Fed has no idea what to do, so they're doing exactly what people do when they don't know what to do: nothing.

In the meantime the European Central Bank hinted that it might continue to raise interest rates next year since Europe's economic growth has become more broadly based and demand for credit is fueling an increase in Europe's money supply.

The combination of the US Federal Reserve leaving interest rates unchanged and the European Central bank hinting at higher rates caused some dollar weakness this week, which, in turn, caused a bit of a rally in the gold price. But, fundamentally, nothing has changed this week. We knew the US economy is slowing down and the market widely expected the Fed leave interest rates alone.

I don't expect the gold price to break out to the upside until the dollar gets hit and in the meantime the decline in the US economy is bad news for base metals. New orders for primary metals in the US declined by 1.0% from August to September (a 12% annualized decline) and shipments of primary metals declined by 2.0% (24% annualized). Because the gold price rallied along with base metals from July last year to May this year, a sharp decline in base metals prices remains the biggest short-term risk to the gold price. But until we get some idea whether base metals are going to fall first, or whether the dollar is going to fall first, it will be difficult to take a hard stance on where the gold price is going. Either one could happen soon, or both stay range-bound for quite some time. It is why markets test our patience and convictions.