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Fed Rate hikes are starting to bite and that is good for gold

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(Kitco News) -After three months of sharp declines, the gold market is seeing some new bullish momentum. It comes as the U.S. economy contracted for the second consecutive quarter.

Economists and politicians are fairly evenly divided as to whether or not the U.S. is in a recession. The National Bureau of Economic Research (NBER) is the agency that would officially declare a recession, which happens after months of research and debate; however, the traditional definition is when an economy contracts for two consecutive quarters.

Despite what politicians and economists might think, consumers are started to feel the effects of rising interest rates and persistently high inflation. Data from the U.S. Conference board this week showed consumer confidence for July fell to its lowest level since February 2021. The growing pessimism is expected to weigh on growth further. At the same time, a Twitter poll this week showed that 80% of Kitco News followers think the U.S. is in a recession.

While we will leave the recession debate to politicians and economists, there is no doubt that the U.S. economy is slowing. The Federal Reserve's monetary policy is starting to bite, and according to market analysts, that is good for gold. Suki Cooper, precious metals analyst at Standard Chartered, said that on average, prices have gained 15% on an annualized basis during the past seven recessions.

In the face of a slowing economy, the U.S. central bank raised interest rates by 75 basis points. At the same time, Federal Reserve said that further aggressive tightening would be warranted if the data supported it.

However, what most investors have focused on is a slight shift in monetary policy. Powell also said that tightening would have to slow as the economy started to feel the effects of rate hikes.

"At some point, it will be appropriate to slow down," he said. "We've been front-end loading these very large rate increases. Now we're getting closer to where we need to."

TD Securities entering tactical gold short following Fed-induced rally

The market now sees the Fed closer to the end of its monetary policy cycle. In a recent interview John Hathaway, senior portfolio manager of Sprott Hathaway Special Situations Strategy, said that he thinks the Federal Reserve pivot could come as early as September as the economy continues to slow.

However, not all analysts are optimistic that gold is ready to take off back to $2,000 an ounce. Friday, the U.S. Department of Commerce's core Personal Consumption Expenditures Price Index shows inflation holding near a 40-year high at 4.8%.

"If inflation remains hot, then the Federal Reserve will continue to raise interest rates aggressively that would cap gold's rally," said Phillip Streible, chief market strategist at Blue Line Futures, in this week's gold survey.

Streible said that with this new rally in gold, he would look to take some profits at a push to $1,800 an ounce.

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.