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Gold firms as investors digest China, inflation, and global economic contraction

Commentaries & Views

Gold futures opened at $1899.60, traded to a low of $1896.30, and then recovered back above $1900 per ounce. As of 4:18 PM EDT gold futures basis, the most active June 2022 contract is currently trading up $9.30 and fixed at $1905.30. Gold’s reversal from its price decline over the last seven trading days is being supported by multiple factors and events.

Most evident is renewed concern by investors regarding China’s worsening Covid-19 infection rates, which has resulted in lockdowns in major Chinese cities which now include areas of Beijing. Over 500,000 cases of Covid-19 have been reported in Shanghai as hazmat-wearing patrols continue to enforce lockdowns throughout the city.

Shanghai is a major port city, and its shutdown has led to the absence of goods being shipped abroad, disrupting the supply chain to the United States of electronics and semiconductors vital to the automotive and electronics industry.

Real concerns about a global economic contraction resulting from China’s lockdowns shook equity markets worldwide. Shipping disruption was a root cause that led to Chinese equity markets selling off dramatically, which had a tremendous impact on U.S. equities today as all major indices experienced deep declines. The Dow lost 809 points or 2.38%, the S&P 500 declined by 2.81%, and the tech-heavy NASDAQ composite dropped dramatically, losing 3.95% or 514 points.

The uptick of Covid-19 infections in China and subsequent lockdowns have raised concerns that inflation will continue to rise and has not peaked as the Federal Reserve has maintained it would. When added to current geopolitical uncertainty regarding the war in Ukraine, these issues are at the core of today’s bullish market sentiment in gold as a safe-haven asset and hedge against both inflation fears and the emergence of risk-off market sentiment. Tapering the bullish market sentiment for gold is dollar strength, along with the potential for the Federal Reserve to initiate a series of rapid rate hikes of ½ a percent at each of the next two FOMC meetings.

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Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.