Gold Jumps 1.8%; Biggest Rally Since March as U.S. Enters Recession

By Barani Krishnan

AiVIF.com -- A U.S. recession means different things to different investors.

To those in stocks, it was an opportunity to chase up stock prices on the reasoning that the Federal Reserve might be benign from here with rate hikes. For the long-oil crowd, it was time to be less presumptuous about demand, given the strong correlation between the economy and energy usage. To bulls in gold, it was a sign that perhaps some serious hedging will begin from now with the yellow metal.

Thus, gold had its biggest one-day rally since March on Wednesday after the Commerce Department said in the first of three estimates that U.S. gross domestic product probably declined 0.9% in the second quarter, after an established drop of 1.6% in the first quarter.

The back-to-back quarterly declines in GDP officially confirmed months of speculation that the United States was headed for a recession. It also unleashed a bull force in gold, a market that had been boxed up for weeks on end with pedestrian price moves that sometimes were no more than a couple of dollars.

Benchmark gold futures for August delivery on New York’s Comex settled down its latest session up $31.20, or 1.8%, at $1,750.30 an ounce, after a session peak at $1,755.

Gold is breaking out now that a peak in Treasury yields is firmly in place. Stagflation is here to stay and that should be good news for gold prices. The U.S. economy is heading towards a recession and as long as Wall Street believes the Fed will deliver a slower pace of tightening, gold should start seeing safe-haven flows again.

“Gold’s biggest risk was that the economy was remaining robust and that the Fed might need to be more aggressive with rate hikes,” Ed Moya, analyst at online trading platform OANDA said.

“The risk of a full-percentage rate hike by the Fed is long gone,” said Moya. “Gold is breaking out now that a peak in Treasury yields is firmly in place. Stagflation is here to stay and that should be good news for gold prices. The U.S. economy is heading towards a recession and as long as Wall Street believes the Fed will deliver a slower pace of tightening, gold should start seeing safe-haven flows again.”

Gold is supposed to be a hedge against inflation but it has not been able to hold up to that billing for most of the past two years since hitting record highs above $2,100 in August 2020. One reason for that has been the rallying Dollar Index, which is up 11% this year after a 6% gain in 2021.

The dollar, a contrarian trade to gold, has fallen almost 1% combined the past two days against a basket of six other major currencies.

Moya, however, said gold could likely face strong resistance at around the $1,800 level.