Gold on recovery path as prices see double-digit gains

(Kitco News) The gold market extended its rally on Thursday as prices saw double-digit gains on a weaker U.S. dollar index and recession fears.

Gold moved sharply higher, with August gold last trading at $1,873.30, up $24.60 on the day. Earlier this week, gold was down near the $1,830 an ounce level. In the meantime, the U.S. dollar index fell 0.61% to 101.87 on Thursday.

"The gold price … is continuing the recovery it began yesterday after dipping below $1,830," Commerzbank analyst Carsten Fritsch. "The upswing is all the more remarkable given that the gold ETFs tracked by Bloomberg also registered outflows of 2.7 tons yesterday."

Gold investors were focused on the ADP employment data on Thursday that showed U.S. private payrolls rising by just 128,000 in May, which was the lowest gain since the pandemic recovery began.

This data is always high on investors' radars because it gives a glimpse into Friday's nonfarm payrolls data. Any weakness in the numbers could help bring down the Federal Reserve's hawkish stance and help gold prices move higher, according to analysts.

"The Fed Fund Futures currently imply U.S. Fed rate increases of 50 basis points each at its next two meetings and a key rate of 2.8% by year's end," Fritsch added.

Concerns over slowing growth in the face of an aggressive Federal Reserve are stirring serious recession fears. The latest stark warning came from JPMorgan Chase CEO Jamie Dimon, who told a crowd at a financial conference in New York about the economic "hurricane" that is coming.

"You know, I said there's storm clouds, but I'm going to change it … it's a hurricane," Dimon as said. "You'd better brace yourself … JPMorgan is bracing ourselves, and we're going to be very conservative with our balance sheet."

And even though the economic situations seem "fine" right now, it is still unclear whether it will be "a minor" hurricane or "Superstorm Sandy." "Right now, it's kind of sunny, things are doing fine, everyone thinks the Fed can handle this," Dimon said. "That hurricane is right out there, down the road, coming our way."

The two most significant risks Dimon is worried about are the Fed's quantitative tightening (QT) that has kicked off on June 1 and the impact of the war in Ukraine on commodities. Dimon is not ruling out oil at $150 or $175 a barrel.

The effects of the Fed's QT are essential to monitor, according to commodity strategists at TD Securities.

"Quantitative tightening finally begins, and liquidity conditions have already significantly deteriorated. Of course, this doesn't come as a surprise but does highlight that the flow-effect of QT still has some bite, which could exacerbate price action in all assets as liquidity evaporates. For the time being, gold prices have managed to sustain elevated levels with consensus positioning still heavily tilted to the long-side despite a hawkish Fed narrative," they wrote on Wednesday.

DoubleLine CEO Jeffrey Gundlach weighed in on the inflation narrative after U.S. Treasury Secretary Janet Yellen admitted that she was "wrong" about where inflation was heading. 

"Excessive stimulus caused inflation. An intelligent twelve-year-old was able to predict it. Ms. Yellen, long-serving Fed Chair…..yes, Fed Chair,…admitted today she was not. On the inflation bright side, and it is a very bright side, Build Back Biden did not pass," Gundlach tweeted.

Excessive stimulus caused inflation. An intelligent twelve year old was able to predict it. Ms. Yellen, long serving Fed Chair…..yes, Fed Chair,…admitted today she was not. On the inflation bright side, and it is a very bright side, Build Back Biden did not pass.

— Jeffrey Gundlach (@TruthGundlach) June 2, 2022

He also warned not to rule out more stimulus from the Fed as the downturn comes. "The dark side of inflation longer term is that in the coming downturn (and there is always a coming downturn) the response from government is almost assuredly going to be more free money. Lots more," he said on Wednesday.

The dark side of inflation longer term is that in the coming downturn (and there is always a coming downturn) the response from government is almost assuredly going to be more free money.

Lots more.

— Jeffrey Gundlach (@TruthGundlach) June 2, 2022

Gold is catching the safe-haven bid this week as market participants worry about the economic consequences of the Fed's oversized rate hikes, said OANDA senior market analyst Edward Moya.

"Gold is getting its groove back on safe-haven flows as investor worries return that the Fed may not be easing up its rate-hiking campaign anytime soon. Wage pressures in the U.S. are not easing and that should keep inflationary pressures going for a few more months," Moya said.

Also, the escalation in Ukraine could bring more safe-haven flows into gold. "The war in Ukraine could see an escalation after the US has signaled, they will give Ukraine advanced rocket systems," he added.

By Anna Golubova

For Kitco News

Follow annagolubova

agolubova@kitco.com

www.kitco.com