Gold Bulls Pick a Fight With the Fed

Gold prices have been falling all month, and it opens the question whether this is a new trend, or can we see a turn around? Well, the latest macro data from the US paints a somewhat gloomy picture for gold in the short term. But beyond that, things get a little murky; and uncertainty is where gold tends to shine.

The US provided a second look at its Q4 GDP, revising it down by two decimals to 2.7% from the flash number. The result shows that the economy remains resilient, despite the actions taken by the Fed. That came in line with the better retail sales and stronger jobs numbers seen earlier in the month, all of which contributed to bringing down the price of gold.

There’s more to the picture

The GDP number was revised lower after considering slower than initially expected consumer spending. Americans are spending less, which means there is trouble in the largest component to the economy. With inflation causing real wages to turn negative for over a year now, people are seeing the pinch in their wallets. While that is overall bad for the people and the economy, because of technical quirks, it can be reflected as positive in the statistics.

One of the larger components driving positive GPD is a shrinking trade deficit. While that sounds good that the country is getting its spending in order, the reason why is worrisome: Americans are buying less, which translates into less imports. And they are buying less because of inflation. With consumer spending under pressure, this is generally a bad sign for the economy in the medium to long term.

Will things turn around?

One of the reasons a recession is expected is because the Fed could keep raising rates, potentially over tightening and causing the economy to falter. On the other hand, if inflation continues to run rampant, then consumers might see their purchasing power devalued so much that it also causes a recession.

Traditionally, gold tends to outperform during a recession as people seek safe havens. So, the prospect of a recession could give some hope that gold could rise sometime in the future. But, for now, with the macro indicators pointing to the economy being able to withstand more tightening, gold bulls are effectively picking a fight with the Fed.

It’s about rising rates

The number of economists forecasting that the Fed will hike by 50bps at the next meeting is still relatively small. Just over a quarter, as a matter of fact. But, it’s a growing consensus; and there are still more than 3 weeks before the meeting. Meanwhile, from the minutes of the last meeting, it turns out the Fed is starting to get worried about the labor market getting too tight.

With the Fed expected to keep raising rates in the short term, the dollar could keep getting stronger. That would make it harder for gold to get back to the $1,900 level. That could change if a recession starts to manifest. But the Fed insists that won’t happen. The data coming out in the next few months will show who is right.

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