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Gold prices testing resistance at $2,000 as ISM manufacturing PMI drops to 46.7%

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(Kitco News) - Renewed recession fears have pushed gold prices back to resistance at $2,000 an ounce after the Institute for Supply Management showed a strong contraction within the manufacturing sector.

The ISM manufacturing index dropped to 46.7% last month, compared to September's reading of 49.0%. The data was significantly weaker than expected, as economists were looking for an unchanged reading.

"The overall economy dropped back into contraction after one month of weak expansion preceded by nine months of contraction and a 30-month period of expansion before that," the report said.

Readings above 50% in such diffusion indexes signify economic growth and vice-versa. The farther an indicator is above or below 50%, the greater or smaller the rate of change.

The gold market was trading in roughly neutral territory ahead of the report and jumped higher in initial reaction. December gold futures last traded at $1,997.80 an ounce, up 0.18% on the day.

According to comments in the latest survey, participants have said that a slowing economy is creating difficult market conditions.

" Seventy-five percent of manufacturing gross domestic product (GDP) contracted in October, up from 71 percent in September," said Timothy Fiore, CPSM, C.P.M., Chair of the ISM manufacturing survey committee, in the report.

The components of the report showed broad-based weakness within the manufacturing sector. The New Orders Index dropped to 45.5%, down from September's reading of 49.2%. At the same time, the Production Index fell to 50.4%, down 2.1 percentage points from the previous reading.

The U.S. labor market also lost momentum last month, with the Employment Index falling to 46.8%, down from the previous reading of 5.12%.

Meanwhile, the report also noted that inflation pressures remain elevated. The Prices Index rose to 45.1%, up from 43.8% in September.

Andrew Hunter, deputy chief U.S. economist at Capital Economics, said that a slowing economy provides little support for the idea that the Federal Reserve will continue to raise interest rates this year.

"The surprise slump in the ISM manufacturing index to 46.7 in October, from 49.0, suggests the recent recovery in factory-sector activity is fading and supports our view that the upturn in economic growth in the third quarter is set to be reversed," he said in a note.

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