The gold market to Jay Powell: ‘Bring it on’

(Kitco News) – It’s hard to deny the safe-haven trade that has propelled gold prices back to $2,000 an ounce. The chaos in the Middle East caused by the Israel-Hamas war is providing solid momentum for gold, but there is more going on in the market than just the safe-haven trade.

We just have to look at gold’s price action on Thursday to see that there is a lot of economic uncertainty underneath the positive façade that is economic growth. The precious metal held its ground as U.S. GDP increased by nearly 5% in the third quarter, significantly beating expectations.

Meanwhile, gold is solidly above $2,000 an ounce heading into the weekend. This comes after U.S. core PCE Index showed inflation rising 3.7% in the last 12 months. Yes, inflation has fallen to its lowest level since August 2021; however, it is still nearly double the Federal Reserve’s target of 2%.

Also released Friday was the updated University of Michigan consumer sentiment survey. While this report isn’t market-moving, it shows a sharp rise in inflation expectations. The report said that survey respondents see consumer prices rising 4.2% by this time next year, up from the initial estimate of 3.8%.

Putting these three reports together would indicate that the Federal Reserve must maintain its hawkish monetary policy stance next week. Interest rates are not expected to rise next week. Still, we can expect Fed Chair Jerome Powell to hold a firm line that the central bank’s work is not done and that interest rates will remain in restrictive territory for the foreseeable future.

An argument could be made that because of the UofM report, the Fed might have to be even more aggressive as inflation threatens to become unanchored.

In this environment, gold prices should be struggling around $1,900; instead, the precious metal is seeing its highest weekly close on record, above $2,000 an ounce.

While geopolitical uncertainty is important for gold, there are other factors we need to pay attention to: growing fears of a credit event leading to a recession.

According to a growing chorus of economists and market analysts, the third-quarter GDP numbers could be the last gasp of economic activity as stubborn inflation and a cooling labor market start to impact consumption.

Growing recession fears also coincide with concerns over the burgeoning U.S. deficit. While positive economic growth supports the bond market selloff, driving 10-year yields to 5%, some analysts have said the market is also impacted by weak demand.

There is a growing concern that there are fewer and fewer foreign investors who are willing to buy U.S. debt. Yields have to go higher to encourage buyers in the marketplace. However, at this point, nobody wants to be the first to step in because there are concerns that yields are nowhere near a peak. Nobody wants to catch the falling knife in the bond market.

However, the higher yields go, the bigger the impact they will have on the broader economy: raising borrowing costs, squeezing credit markets, and driving mortgages higher, just to name a few.

The U.S. economy is being choked off by the very asset many see as a safe haven. In this environment, the only true safe harbor is gold and that will remain the case unless Powell does something unexpected to cap bond yields.

Gold’s push back to $2,000 could be the start of something bigger.

Have a great weekend.