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Gold Climbs As U.S Economy Shrinks

Derek Wolfe

Updated: July 29, 2022

year end gold price target
Editor’s Note:

EDITOR’S NOTE: If gold is still the proverbial “canary in the coal mine,” then perhaps investors ought to look to gold’s surge yesterday rather than settling on the market’s incomprehensible rally after the not-so-good news that US GDP has declined for a second consecutive quarter. Typically, we’d call that a recession. But it appears that Biden wants to keep America optimistic against its own better interests, by reframing a rainy day as sunshine (the WH recently changed the definition of recession on its official website). With gold's $1,680 per ounce support level having proved resilient, it supports the case that the recent declines provided investors with yet another favorable buy point; one likely missed by most of the crowd (except for the few who saw the dip for what it was). Today’s personal consumption expenditure price index report (for June) gave us the biggest inflation increase since January 1982. Price floors are relative. But considering everything going on in the current economic environment, $1,680 looks pretty solid.

Bloomberg) -- Gold climbed after the US economy shrank for a second consecutive quarter, pushing the dollar and Treasury yields lower, and clouding the outlook for further aggressive interest-rate hikes as the Federal Reserve fights inflation.

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Bullion rallied as much as 1.3% to a three-week high after a report showed US gross domestic product fell 0.9% in the second quarter as inflation weighed on consumer spending. Chairman Jerome Powell said while a move similar to this week’s 75 basis-point hike was possible again, the pace of hikes will slow at some point.

“Wall Street is convinced that the Fed will likely pivot to a slower pace of tightening in September,” Ed Moya, senior market analyst at Oanda Corp., said in a message. “The unexpected contraction of the US economy means that both the peak in Treasury yields has been made and a bottom has been formed for gold. The stagflation playbook is bullish for gold prices.”

Spot gold gained 1.0% to $1,751 an ounce at 01:56 p.m. in New York. The Bloomberg Dollar Spot Index was little changed after losing 0.6% in the previous session. Silver and palladium advanced.

The Federal Open Market Committee “is strongly committed to returning inflation to its 2% objective,” it said in a statement, repeating language that it’s “highly attentive to inflation risks.” Powell said officials would set policy on a meeting-by-meeting basis rather than offer explicit guidance on the size of the next move.

Gold prices rallying was a straight-forward reaction in response to the disappointing data,” Fawad Razaqzada, market analyst at StoneX, said in an e-mailed message. The US GDP data re-affirmed his view that the Fed will have to slow down the pace of interest-rate hikes and potentially go into reverse in early 2023.

The traditional haven is still heading for a fourth straight monthly loss as recent dollar strength and rising interest rates have combined to dim the precious metal’s appeal. Holdings in bullion-backed exchange-traded funds are headed for the biggest monthly drawdown since March 2021.

“The absence of a specific timeline pertaining to the moderation of interest rate hikes still carries some form of vagueness,” said Yeap Jun Rong, market strategist at IG Asia Pte. “Gold prices are riding on the hopes that with it being brought up by Powell at the meeting, some consideration is in place and moderation could come sooner rather than later.”

“That said, the Fed has maintained its clear focus on taming inflation and the upside risks to inflation clearly remains,” said Yeap. “This carries the risk of any inflation persistence ahead keeping the pressure on for the Fed to continue on its hawkish path and put a cap on gold prices’ upside.”

Meanwhile, demand for gold jewelry may slip through 2022 due to weaker economic growth in the biggest markets of China and India, according to the World Gold Council. Physical demand helps provide a floor for prices.

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