The gold market is seeing some upside in early action Tuesday as the International Monetary Fund, or IMF, trimmed its global growth forecast. The organization cited numerous reasons for the cut that included supply chain issues, the Delta variant and price pressures. The forecast for 2021 now stands at 5.9%, down from 6%. There were no changes made to the 2022 forecast.
The IMF described the revision as modest while it said that the effects for some countries would be large downgrades. The IMF said the outlook for low-income developing countries has declined significantly, largely due to the ongoing viral pandemic. The outlook for developed nations also signifies difficulties due to supply chain constraints and other factors. Such supply disruptions caused a decline in the U.S. forecast from 7% to 6%. The report went on to suggest that if the U.S. does not pass the Biden infrastructure plan, it could cut its forecast even further.
The IMF discussed its views and said that the effects of Covid-19 may fuel increased risks to the economy. It also said that it was concerned about the possibility of a divergence in economic prospects across nations. This makes sense, given the fact that some 96% of the population in low-income countries remains unvaccinated.
The report pointed out inflation risks that may be skewed to the upside while growth risks are pointing to the downside. This could lead to central banks being forced to move and move quickly if inflation remains stubbornly high.
The report fueled some buying in the gold market which saw double-digit gains following it. The buying pressure was likely partly alleviated by a stronger dollar, however.
The threat of rising inflation remains at the center of investors’ attention. With inflation reports due for release tomorrow and Thursday, traders appear increasingly nervous. These reports will be closely scrutinized and could be market moving if any significant data is seen. Markets are not only worried about inflation, but are also still concerned over Chinese company Evergrande. The massive property company recently reportedly missed another large debt payment. This is causing some fear of contagion in the marketplace and any new developments will be closely monitored by market participants.
As the next several weeks unfold, markets are likely to pay very close attention to the data stream. Any data strength may give the Fed further reason to announce tapering at its meeting next month. Any weakness could, however, keep the central bank on hold until sometime next year. Any uncertainty surrounding the Fed and its plans could keep volatility on the rise into next year and could fuel demand for safe haven assets such as gold.
For the time being, gold remains in no man’s land. The bulls will look to target the $1800 and then the mid 1830s on a closing basis to build momentum. The bears will target further downside to $1700 and then $1670 on a closing basis to build their case.