The gold market has been pricing in a pivot from the Federal Reserve since mid-2022. After two years of disappointment, the precious metals market finally got the signal it had been waiting for, and investors weren’t disappointed.
The Federal Reserve signaled that it is looking to cut interest rates in September. After leaving interest rates unchanged, Federal Reserve Chair Jerome Powell said in a press conference that a case could be made for a cut “as soon as the next meeting.”
“We think the time is approaching,” he said.
The central bank’s dovish stance helped to propel gold prices to a new all-time high of $2,500 an ounce.
While the Fed is finally comfortable cutting rates, it might prove to be a little too late as recession fears have pick up. Gold caught a solid safe-haven bid Friday morning following significantly disappointing employment numbers.
According to the Bureau of Labor Statistics, the U.S. economy created only 114,000 jobs last month. The data missed expectations, as economists were looking for job gains of around 176,000. At the same time, the unemployment rate jumped to 4.3%, up from June’s reading of 4.1%. Economists have focused on this component of today’s employment report because it has triggered the Sahm Recession Indicator, which has successfully predicted a recession 100% of the time.
According to the rule, the start of a recession can be determined when the three-month moving average of the national unemployment rate rises by 0.50 percentage points or more relative to the minimum of the three-month averages from the previous 12 months.
Instead of proactively cutting rates to support a resilient economy, the Federal Reserve has been caught on the wrong foot and will have to cut rates in a weakening growth environment. Some economists and analysts have said that the Federal Reserve could be forced to act quicker and more aggressively to support a sputtering economy. Not only are markets pricing in three rate cuts for this year, but they are not ruling out a 50-basis point move at some point.
This creates a positive environment for gold, and this is the scenario many analysts have been forecasting, as the Federal Reserve will be forced to lower interest rates as inflation remains stubbornly elevated.
However, as we can see from the price action on Friday, a recession is not the greatest news for gold because it creates volatile markets. Recession fears have triggered a sharp selloff in equity markets. This week, the S&P 500 dropped nearly 4%, with most of the selling coming on Thursday and Friday. The previously strong tech sector has been hit even harder, with the Nasdaq ending the week down nearly 5% from its highs. This week, the Nasdaq officially entered bear market territory as it is now more than 10% down from its all-time highs in mid-July.
Weaker equity markets will create some safe-haven demand for gold; however, investors should note that recession fears will create some volatility. Investors may be forced to sell profitable trades to cover their equity losses, which will create some selling pressure in gold.
We are already seeing this happen. Heading into the weekend, gold has fallen back below $2,500 as investors were forced to raise capital. We could continue to see lower prices in the near term; however, in this environment, the precious metal is ripe for higher prices in the long term.
That’s it for this week. I will be on vacation for the next two weeks, so the newsletter will be back on Aug. 23. Until then, enjoy the summer.
Source: Neils Christensen Kitco
