March 28, 2023

Gold rose 2% as a key recession gauge hits a 40-year high

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(Kitco News) – The gold market is no longer afraid of the Federal Reserve’s aggressive interest rate stance, as a critical recession marker has reached its highest level in four decades, according to some market analysts.

The price of gold is seeing significant momentum early Friday as investors react to news that two-year Treasury yields rose more than 50 basis points above the 10-year yield. This is the most significant yield curve inversion since the 1980s, which was also the last time the Federal Reserve tightened interest rates this aggressively.

December gold futures last traded at $1,665.70 an ounce, up more than 2% on the day. The gold market is also being helped by the renewed hunt for bargains, as the price has managed to hold critical support near last month’s lows of $1,621 an ounce.

Many economists have observed that an inversion of the yield curve—the cost of short-term borrowing exceeds the cost of long-term borrowing—has always preceded recessions.

“The threat of a recession is at a 40-year high and continues to support the price of gold,” said Ole Hansen, head of commodity strategy at Saxo Bank.

While markets still expect the Federal Reserve to raise interest rates aggressively through 2023, Hansen said those expectations could quickly change if the threat of a recession materializes.

“Investors are quickly realizing that the Fed will not be able to get inflation back to its 2% target. We expect economic growth to slow and inflation between 4% and 5%, and this environment will be bullish for gold.”

Bullish sentiment has quietly crept into markets in the past week after the World Gold Council said global physical demand for gold rose 28% in the third quarter. Along with solid retail demand, the report said central banks bought nearly 400 tonnes of gold between July and September, the largest single quarter of purchases on record.

While there has been strong retail demand in the precious metals market, investor demand has been dismal, which analysts say has had the biggest short-term impact on prices.

Analysts have said, however, that a rise in investor sentiment could spark new safe-haven demand for gold.

“You don’t have to look very hard to find things to worry about in this economy, and as that fear grows, gold becomes much more attractive,” said Bob Minter, head of ETF investment strategy at abrdn.

Although gold rose significantly on Friday, analysts note that there is still work to be done. Hansen said gold is bottoming out and now investors need to see how high prices can go.

He added that he wants to see prices rise above the initial support at $1,675. However, the ultimate target is around $1,730 per ounce.

“We can confidently call a bottom if prices can rally back above $1,735. That puts gold back in an ascending uptrend,” he said.

Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect his own Kitco Metals Inc. The author has made every effort to ensure the accuracy of the information provided; However, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is for informational purposes only. It is not a solicitation to make exchanges in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article accept no responsibility for any loss and/or damage arising from the use of this publication.

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