Gold continues to slide as focus remains on rate hikes and recession
Inflation, interest rates and recession
President Powell’s testimony before Congress this week painted a dire economic outlook that will include continued contraction in national GDP coupled with continued interest rate hikes.
During his testimony, it was evident that there was a subtle difference in his uncharacteristic word trail and a drastic departure from his usual refined method. The President clarified that the Federal Reserve has one goal in mind above all else and that is to reduce the level of inflation. They said emphatically that the actions of the Federal Reserve would most likely lead to a recession rather than a soft landing.
Yahoo finance captured his general behavior most articulately saying, “He said a recession caused by the Fed’s own monetary tightening remains a ‘possibility.’ A soft landing, with higher rates but a consistently healthy economy would be “very difficult” to achieve. And Powell said the Fed’s fight against inflation was “unconditional,” meaning nothing will stand in the way.”
Revisions by the Federal Reserve to their monetary policy would most certainly contract the economy and trigger a recession. A recession is defined as “a period of temporary economic decline during which commercial and industrial activity is reduced, usually identified by a decline in GDP in two successive quarters”.
The latest GDP report revealed that the United States experienced an economic expansion resulting in GDP growth of 6.9% for the fourth quarter of 2021. If the advanced estimates for the first quarter GDP are correct, this will indicate a decrease in real gross domestic product (GDP). for the first quarter of this year. The last occurrence of a quarter-on-quarter GDP contraction occurred during the second quarter of 2020. However, the following quarter (the third quarter of 2020) showed a robust increase in national GDP.
This is why next week’s report is so critical. On Wednesday, June 29, the BEA (Bureau of Economic Analysis) will release the first quarter US GDP report. According to the advanced estimate released on April 28, “real gross domestic product (GDP) shrank at an annual rate of 1.5% in the first quarter of 2022, according to the “second” estimate released by the Bureau of Economic Analysis. fourth quarter, real GDP increased by 6.9%”.
Currently, there is a high probability that the actions of the Federal Reserve will lead to a recession. The question is not whether or not the United States will enter a recession, but rather when the recession will start and how long the recession will last.
What is the impact of these factors on gold?
While a recession can stabilize the price of gold and higher inflation certainly creates an uptrend for the precious yellow metal, rising interest rates have become a priority for the future price of gold. and has driven prices down since March of this year. Gold is down just over 12% from March highs of $2,070 to the current gold price of $1,828. Although there does appear to be strong support for gold at $1800 based on the aggressiveness of the Federal Reserve on further rate hikes.
Along with the GDP report due out on Wednesday, the government will release its latest core inflation figures on Thursday when the US PCE price index is released.
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Wishing you as always good exchanges,
Gary S. Wagner