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The S&P 500 is just getting started; further declines in equity markets will continue to support gold prices - analysts

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(Kitco News) - Continued selling pressure in equity markets is helping the gold market shine again as a safe-haven asset. According to some economists, rising inflation pressures are adding to the growing risks of an economic slowdown.

The gold market has managed to push above critical initial resistance at $1,830 an ounce as equity markets continue to suffer. According to market analysts, investors are fleeing stocks as rising inflation weighs on earnings for the first quarter.

Wednesday, the S&P 500 dropped 4%, its worst one-day decline since June 2020, when the global COVID-19 pandemic roiled financial markets. The selling pressure hasn't eased much as the S&P is down another 1% on Thursday.

Meanwhile, gold prices managed to find support at $1,800 an ounce Wednesday and have seen some technical follow-through buying Thursday. June gold futures last traded at $1,843.70 an ounce, up 1.5% on the day.

"Gold appears to be finally seeing some safe-haven flows as markets react strongly to the threat of recession rather than just higher interest rate expectations. The latter has driven yields higher and made the dollar more attractive while the economic woes they contribute to seem more suited to gold inflows, it seems," said Craig Erlam, senior U.K and European market analyst at OANDA.


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Although gold's price action in the last two months has been disappointing, some analysts have said that it has played its role as a safe-haven asset, outperforming equity markets. Gold is roughly neutral on the year while the S&P 500 is down 18%.

In the near term, some analysts are looking for even lower equity markets.

"We think the latest fall highlights that earnings expectations are set to become a growing headwind to equities, a risk we have been warning of for a while," said Thomas Mathews, markets economist at Capital Economics, in a note Thursday.

"We don't expect the pressure on valuations to ease any time soon. Although headline inflation may have peaked, the Fed is still clearly uncomfortable given how far above target it is, as Jerome Powell emphasized earlier this week. The central bank, in our view, is unlikely to significantly back off from its tightening plans until inflation is much more under control," he added. "In other words, we don't think the "Fed put" will come into effect anytime soon.

Matthews said that when the dust settles, he expects the S&P 500 to bottom out around 3,750 points.

Although rising interest rates, as the Federal Reserve looks to aggressively raise interest rates through the summer, remain a headwind for gold, some analysts have said that market volatility should provide a counterbalance.

"Further losses in the stock markets are likely to support gold and silver. However, gold and silver bulls have been disappointed that the selling pressure in the stock indexes the past few weeks has not been more supportive to the safe-haven metals," said Jim Wyckoff, senior technical analyst at Kitco.com.

Wyckoff added that while equities provide vital gold support, the big driver for the precious metal remains inflation.

"Overall, rising inflation that will become even more problematic in the coming months will be bullish for the metals," he said.

Ole Hansen, head of commodity strategy at Saxo Bank, said that gold's push above $1,839, could help reverse some of the bearish sentiment that has plagued the market. However, he added that the market still has some heavy lifting.

"Gold is not out of the woods yet, and it's too early to talk about $2,000, but for now, the outside markets have turned more gold friendly than in quite a while," he said in a comment to Kitco News.

"We maintain a bullish outlook for gold given the need to diversify amid a troubled stock market and the increased risk of a policy FOMC policy mistakes driving yields and the dollar lower," Hansen said in a report published Thursday. "From an absolute return perspective, gold's year-to-date performance in dollars can be viewed as a disappointing, but when considering the impact of the stronger dollar and the steep losses in stocks and bonds, any diversified investor with gold is likely to be satisfied."

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.