The gold market is just below the unchanged line in late morning action Thursday. The slight decline seen in gold is a far cry from the gains seen earlier in the session. Gold had popped higher upon the release of the latest GDP data which showed a contraction for Q1. GDP data showed a decline of 1.4%, far below analyst expectations for a rise of 1%. The news fueled some buying in gold, which quickly ascended to the mid $1890s before faltering. Economists were looking for a slowdown compared to Q4 of last year, and today’s reading reiterated the fact that Covid continues to play a major role in economic activity.
The slower growth story could continue as the year progresses. The Fed will still actively fight inflation through several interest rate increases. Those rate hikes will, however, likely weigh heavily on the economy and fuel a further slowdown that could even turn into recession. There are many unknowns, in fact, surrounding the increasingly aggressive Fed and what it may do in the year ahead. What appears clear at this point, however, is that the central bank is intent on getting price pressures under control and will do whatever it deems necessary to do so.
Not only will tightening monetary policies slow down economic activity, but the viral pandemic could also continue to play a major role. Lockdowns across major Chinese cities are already being felt globally, and if they remain closed for an extended period of time, some real damage to the globe’s second-largest economy is likely to occur. If the virus is to see a rapid and wild spread again, the effects could be devastating for the global economy. Such a scenario would put even more pressure onto already-strained supply chains and already-high inflation could explode even higher.
Inflation remains a major negative for global markets and economies. The hottest price pressures in some 40 years are taking a bite out of consumer spending, and that bite may increase should prices rise further. Due to the threat posed by inflation, the Fed and other global central banks may act more aggressively than previously anticipated and could hike rates at a faster pace. The U.S. Fed is already likely to raise interest rates by 50-basis points at its next two meetings after hiking by 25-basis points last month.
Even with several rate hikes for the year or some larger rate hikes, interest rates are still likely to end 2022 under the 3% level. Real rates are likely to remain negative, and until they move into positive territory the gold bulls may be undeterred.
The bears are still in control of the daily chart, although not by much. The bulls will look for a climb to take prices above resistance at the $1950 and $2000 levels. The bears are shooting for a decline to produce a close below support in the $1850 region.