Recession Fears, Giving Gold A Modest Bid, But More Is Needed - Analysts
(Kitco News) - The gold market is seeing a modest boost Wednesday as global recession fears increase in the marketplace, but analysts say that more work needs to be done if the precious metal is going to see a material shift in its fortunes.
Further declines in U.S. 10-year bond yields, falling to their lowest level since mid-September 2017, are helping gold hold its ground, but so far the reaction to an impending recession has been muted, according to some economists. The U.S. 10-year bond yield last traded at 2.22%. Meanwhile, June gold futures last traded at $1.282 an ounce, up 0.38% on the day.
Ole Hansen, head of commodity strategy at Saxo Bank, said in a telephone interview with Kitco News that growing recession fears are positive environment for gold, but for prices to break its orbit around $1,300 an ounce, fear sentiment has to turn into reality.
“We need to see a few more weak data points in the U.S. to highlight the risks of a recession,” he said.
Saxo Bank does not see a lot of good news for U.S. or global economies. In a report, Wednesday, Steen Jakobsen, chief economist for the Danish bank, said that the global economy is being hit with a double-whammy of rising recession concerns and escalating trade tensions between China and the U.S.
“The twin circumstances of an incoming recession and a massive, trade war-related breakdown in the global supply chain have joined forces to lean heavily on risk sentiment,” he said.
Jakobsen added that the Federal Reserve is behind the curve and will have to move aggressively to support the softening economy.
“We see the Fed cutting by at least 50 basis points by October,” he said.
The CME FedWatch Tool shows that markets are pricing in an 84% chance of a rate cut by December.
Hansen added that aggressive interest-rate cuts will eventually push the U.S. dollar lower and support gold prices.
However, he also added that investors shouldn’t ignore gold’s recent dismal price action. He said that he prefers to wait for gold prices to show a sustained break above $1,300 before jumping into the market.
He added that because of the growing uncertainty, many investors are sitting on their hands, waiting for the right time to buy gold.
Although lower bond yields are positive for gold, the precious metal still has to contend with a stronger U.S. dollar.
David Madden, market analyst at CMC Markets, said that although the environment is improving for gold, there is still limited upside.
“Despite the chaos in equity and bond markets, we aren’t seeing any major moves in currencies,” he said. “The U.S. dollar is still holding its own and that will weigh on gold prices. Gold is marginally attractive in this environment.”
Jasper Lawler, head of research at London Capital Group, also said that a resilient U.S. dollar is keeping gold subdued.
“Dollar strength is preventing gold from glowing under its safe-haven status,” he said in a note to clients. “Technically, strong resistance can be seen at $1,286, a high that gold has unsuccessfully tested for the past three consecutive days.”