(Kitco News) - Gold prices are ending the week a little heavy as prices see some solid selling pressure after hitting a new record high above $2,220 an ounce. While gold is ending the week pretty much where it started, we shouldn’t lose sight of the broader landscape.
To paint a very specific picture, like the crowds who gather in Pamplona, Spain, every year, it's time to tighten your red sash because gold investors are running with the bulls.
Yes, I admit the description sounds a little over the top, but it’s hard to be modest after the week we’ve had. Wednesday, if you listened carefully, you could hear a collective sigh of relief from the gold market after the Federal Reserve released its latest interest rate expectations.
The infamous “dot plots” show that the central bank still sees three rate hikes this year. At the same time, it will embark on a new easing cycle as inflation is expected to remain above its 2% target.
Stubborn inflation coupled with falling interest rates means that real interest rates will be headed lower, which should put some pressure on the U.S. dollar, weakening two major headwinds for gold.
There is also a question of the health of the U.S. economy. The Federal Reserve revised its GDP forecasts significantly this week. The central bank now sees the economy growing 2.1% this year, up from the previous forecast of 1.4%.
The debate regarding the health of the economy remains centered on inflation. Elevated consumer prices are why many are struggling and worried about the future.
This week, LegalShield, a Legal services company that provides Americans with easy and affordable access to legal advice, counsel, protection, and representation, released its monthly Consumer Stress Legal Index (CSLI), which shows a trend of rising economic stress with February’s headline index rising to 64, an 8.8% gain year over year.
The glaring question investors should ask themselves is: If the Fed is so confident that the U.S. economy will be fairly resilient this year, why would it need the support of three rate cuts?
While the Federal Reserve may be optimistic about the health of the economy, there are still plenty of risks looming on the horizon. This week, economists at Deutsche Bank pointed out that the 2-year/10-year yield curve has now been inverted for the longest time on record. Yields on two-year notes have been above 10-year yields since early July 2022, exceeding the previous 624-day record inversion in 1978, the economists said in a note Thursday.
An inverted yield curve is a headwind for economic growth because higher short-term yields lift borrowing costs on consumer and commercial loans, and lower yields for long-term lending discourage risk-taking.
In this environment of uncertainty, gold remains well-supported, so break out your running shoes.
Have a great weekend.
