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Gold price remains chained to $1,850 as OECD lowers growth forecasts

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(Kitco News) - The gold market remains stuck in relatively neutral territory, with prices holding around $1,850 an ounce even as the Organisation for Economic Co-operation and Development (OECD) lowers its growth forecast for this year due to rising inflation pressures.

International organizations continue to sound the alarm on the global economy's health as rising food and energy prices as weigh on activity. The OECD is the latest to downgrade its growth forecasts; however, analysts note that stagflation could still be avoided.

In its latest report published Wednesday, the OECD said that it sees worldwide GDP rising 3% this year, down from its previous projection of 4.5%; at the same time, economic growth is expected to rise 2.75% in 2023.

The OECD said that inflation remains the biggest threat to the global economy.

"Inflation projections now stand at nearly 9% in OECD countries in 2022, twice what we were previously projecting. Elevated inflation across the globe is eroding households' real disposable income and living standards, and in turn lowering consumption. Uncertainty is deterring business investment and threatening to curb supply for years to come," wrote Laurence Boone, OECD Chief Economist and Deputy Secretary-General, in his opening remarks.

Although inflation fears continue to dominate global financial markets, the gold market, a traditional inflation hedge, is not seeing a lot of new interest. Gold prices have been consolidating around $1,850 an ounce for the last three weeks. August gold futures last traded at $1,855.20 an ounce, up 0.17% on the day. Some market analysts have said that goldprices need to push back above $1,870 to $1,880 to attract new bullish momentum.

Many analysts have said that gold's recent lackluster performance is because central banks around the world are looking to tighten interest rates to try and cool red-hot inflation pressures.


Gold price to average around $1,830 in 2022, a new record - Metals Focus

OECD said that higher interest rates worldwide are now needed.

"Globally, the elevated levels of inflation and employmenttodaysuggest there is no longer a need for monetary policy accommodation. However, in many regions, inflation is driven by food and energy. If monetary policy cannot address such supply shocks, it can send signals that it will not allow inflation to rise or spread further. Removing accommodation is therefore warranted across the globe, but with particular caution in Europe where supply-driven inflation dominates," Boone said.

Exacerbating the inflation fears and weak economic activity in Russia's ongoing war in Ukraine. The report highlighted the growing risks of a prolonged war.

"The major influence of Russia and Ukraine on the global economy is via their role as important suppliers in a number of commodity markets. Together they account for about 30% of global exports of wheat, 15% for corn, 20% for mineral fertilisers and natural gas, and 11% for oil," the analysts said. "A particular concern is that a cessation of wheat exports from Russia and Ukraine could result in serious food shortages in many developing economies. There would be an acute risk not only of economic crises in some countries but also humanitarian disasters, with a sharp increase in poverty and hunger."

Although rising commodity prices could create an environment of stagflation, this is a scenario the EOCD said thinks can be avoided.

"The conjunction of soaring energy prices and growing worries about a sharp slowdown in growth has spurred talk of the global economy experiencing a new period of stagflation, a term redolent of the oil shocks of the 1970s. While there are indeed increasing similarities between the current situation and the mid-1970s after the first major oil price shock late in 1973, there are also differences that could mean that growth is more resilient now than on that occasion, and that inflationary pressures wane more quickly and durably," the analysts said.

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