SeBy Renisha Chainani, Head-Research, Augmont Gold For All
Gold continues its consolidation phase as a tug-of-war between rising Inflation and Recession worries support the prices while rising Interest rates and Treasury Yield act as a headwind. Gold rose slightly this week as the dollar fell and economic fears grew, but the metal’s persistent battle with predictions for aggressive Fed tightening kept it on track for a weekly loss.
In testimony before Congress, Fed Chair Powell stated that the central bank’s commitment to containing 40-year-high inflation is “unconditional,” but he also acknowledged that drastically higher interest rates may raise unemployment. Higher interest rates enhance the opportunity cost of keeping non-yielding metals, and the Fed’s hawkish approach, along with general dollar strength, has set gold consolidating in a range.
Furthermore, analysts polled by The Wall Street Journal have drastically increased the likelihood of a recession in the next 12 months, putting it at 44 per cent, a level usually seen only on the eve of or during actual recessions. The likelihood of a recession has risen dramatically this year, as inflationary pressures have remained high and the Federal Reserve has taken increasingly forceful measures to combat them. In the Journal’s most recent survey in April, economists put the risk of the economy entering a recession sometime in the next 12 months at 28 per cent, up from 18 per cent in January.
I continue to believe that gold will set a new record high in the second half, as the economy slows and inflation remains strong. The most crucial (supportive element) is the potential of present central bank activities causing a hard landing, which means that a U.S. recession could arise before inflation is brought under control, resulting in a period of stagflation, which has historically been bullish for gold.