What's gold price outlook as markets shift from inflation to recession fears?
(Kitco News) Gold's volatility has been relatively low compared to other assets as the precious metal retains its "mild bull market" status and trades comfortably between $1,800-$1,900 an ounce. But don't expect a gold price rally until some confidence returns to the marketplace, according to MKS PAMP.
There is a shift in the market as inflation fears give way to recession panic, with equity investors opting out for cash over safe havens like gold, said MKS PAMP metals strategist Nicky Shiels.
"There has been unprecedented damage in equities (and other assets) where money has retreated into cash/US$, less so havens. Confidence needs to return," Shiels wrote in a note Thursday. "With the sell-off last week in the SPX, its correction is in line with the median correction seen in post-WWII recessions, but it's now the 4th worst 'non-recession correction' over the same period. We are in a market recession. Technically, SPX entered a bear market on June 13."
The irony for gold bulls is that the precious metal will likely need to see a combination of lower yields and a move higher in U.S. equities for gold to rise to the $1,880 an ounce level, she explained.
As things stand now, gold will have more buyers at the $1,900 an ounce price tag versus the $1,800 an ounce. "There's a notable lack of interest from the investment community (outside of retail coin/bars!)," she said. "The carnage in stock markets and other asset classes have kept the marginal player at bay."
One potential price rally trigger would be if the Fed "breaks something" as it aggressively tightens monetary policy.
"Fed funds is only 1.75% (with CPI at 8.6%). Last week the Fed acknowledged inflation [and] took on … a 75bps hike. Overall, the details of the Fed statement were pretty dovish (they have acknowledged the economy is worsening), and recession talk has grown as data continues to disappoint and commodity pricing responds to demand destruction fears," Shiels described.
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And as the Fed continues to make adjustments to its "unconditional" fight for price stability, recession risks are getting more visible in the daily macro data.
"Today's sentiment wasn't helped much by lousy PMI data. Specific consumer & inflation-sensitive sectors like travel are still June's largest decliners and are the poster child for the soaring inflation and strained consumer," Shiels said.
The latest flash PMI data signaled "the weakest upturn in U.S. private-sector output since January's Omicron-induced slowdown in June," research firm IHS Markit said in its latest report.
According to the report, June's flash U.S. manufacturing Purchasing Managers (PMI) Index dropped to 52.4, marking a 23-month low. The service sector saw the PMI reading fall to 51.6 in June, marking five-month lows.
The one outcome that would be bad for gold is if the Federal Reserve remains too hawkish, Shiels pointed out.
"To get inflation and the macro backdrop right, one should get commodities right, and if the Fed continues to hike at +-50bp clips into pressured commodities prices and a lofty US$, that's an added form of monetary tightening; that would be a huge tightening cycle and behind the bearish Gold narrative (or at the very least explains the hesitancy of broad-based investor subscription)," she said.
At the time of writing, August Comex gold futures were trading at $1,826.60, down 0.64% on the day.