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(Kitco News) Gold tested support around the $1,900 an ounce level Thursday, pressured by expectations of two more rate hikes from the Federal Reserve amid plenty of evidence that the U.S. economy remains resilient. But this hawkish outlook can still be reversed in the second half of the year, according to Bloomberg Intelligence.
There is a view that the stock market could follow in copper's footsteps in the second half of the year, which would help gold recover towards $2,000 an ounce, said Bloomberg Intelligence senior macro strategist Mike McGlone.
At the time of writing, August Comex gold futures were trading at $1,917.00 an ounce, down 0.27% on the day.
"If the stock market in 2H follows copper's 2Q downward trajectory, Federal Reserve tightening expectations might reverse and buoy gold, we believe," McGlone said Thursday. "Bloomberg Economics and the inverted yield curve leaning toward U.S. recession in 2H may accelerate the year-over-year deflation trend in industrial metals and broad commodities, with gold the notable exception."
Federal Reserve Chair Jerome Powell noted that inflation would have to come down sharply for the Fed to pivot. "We will be restrictive as long as we need to be. But if inflation is coming down sharply, it would be a different situation, and you would think about loosening policy. We are a long way from that," Powell said during this week's ECB forum in Sintra, Portugal.
McGlone is looking at copper, warning that its renewed selloff could spell losses for the S&P 500. "At about $3.75 a pound, reverting toward $3 in a U.S. recession and global economic slowdown might seem logical for the metal, with implications for the stock market and rates," McGlone said in his mid-year metals outlook," he said. "Copper's potential to resume the downtrend since 2022's high augurs headwinds for equity prices and Treasury bond yields."
The U.S. economy remains resilient for now, with macro data surprising on the upside. But Bloomberg Intelligence is still projecting a recession. "That the most central banks in history kept raising rates in 1H, on the back of bouncing equities and sticky inflation measures like personal-consumption spending, might delay the inevitable and make it worse," McGlone warned.
The U.S. can still enter a recession that would be worthy of the most aggressive global central bank tightening in decades, McGlone added, pointing to a massive liquidity pump that preceded it. In this scenario, gold is one of the few assets that will benefit.
"The Fed has never tightened with the Conference Board's US LEI in such deep negative territory, which could have implications for a deflationary recession and gold to outperform the market," he wrote. "The gold-to-S&P 500 ratio bottom[ed] in 2000, about when LEI dropped at a similar velocity as now and the Fed started cutting rates."
A stock market selloff is necessary for the Fed to stop tightening. Until that happens, the gold market has much to fight against, including strong ETF outflows.
In a scenario where the U.S. can avoid a recession, gold will get stuck below $2,000 an ounce. But that is not what McGlone is projecting. "Our bias is for an economic contraction worthy of the unprecendented pump then dump in liquidity," he said.
