Gold touches nine-month high on recession fears

Global recession concerns stoke safe haven bid for gold

Gold was headed for a fifth weekly gain after touching its highest level in nine months as recession fears boosted safe haven demand for the precious metal.

The spot gold price was at USD 1,929.53 an ounce at 10:30 GMT on Friday, 20 January, from 1,920.21/oz a week earlier. Gold futures were at 1,930.70/oz on Friday morning in London, up from 1,921.70 last Friday. Both instruments reached their highest since April 2022 in the previous session and were headed for a 0.5% weekly gain.

Gold prices posted a more than 1% jump on Thursday, 19 January, as stock markets around the world tumbled following a set of weak corporate earnings and worse-than-expected economic indicators from the US.
 

US indicators

Two indicators, in particular, fuelled those concerns. US manufacturing output tumbled in December and US retail sales declined by the most in a year,  reports published on 18 January showed.

US manufacturing output dropped 1.3% last month, after falling a revised 1.1% in November, and compared with economists' consensus expectation for a 0.3% drop.

Retail sales declined 1.1% in December from November, a steeper than the 0.8% drop predicted by economists.

In addition, several US Federal Reserve policymakers made hawkish comments this week, adding to the recession worries, because the prospect of a prolonged period of tighter interest-rate policy may choke off economic growth.
 

'Stay the course'

Fed Vice Chair Lael Brainard said on Thursday that interest rates will need to remain high, even though there are signs that inflation is beginning to ease.

"We are determined to stay the course,” Brainard said in a speech.

Another Fed official, Loretta Mester, President of the Cleveland Federal Reserve said in a 19 January interview with the Associated Press that according to her projections “we need to do more, we need to get above 5% and then hold it there for some time.” The Fed will need to keep rates at that level "until inflation expectations are very well anchored at 2%," she added.

“I just think we need to keep going, and we’ll discuss at the meeting how much to do”, she said.

The comments increased uncertainty about the trajectory of US interest rates this year and raised concerns the peak in the Fed’s rate-hiking campaign may be higher than current market expectations.
 

Interest rate path

Traders are expecting that the Fed will further slow the pace of its interest rate hikes to a quarter-point move at a policy meeting next month. The Fed raised rates by 50 basis points in December, after four, back-to-back 75-basis-point steps.

In total last year, the Fed raised rates seven times to combat inflation. It brought its key interest rate target to between a 4.25% and 4.50% range, from a 0% to 0.25% range at the start of 2022. The steep increases eroded the safe-haven appeal of holding gold, which pays no interest, in comparison with the US dollar and US Treasury notes.

Futures pricing predicts a 94.3% probability of a 25 basis-point increase, according to the CME Group’s FedWatch Tool. However, traders are expecting a peak of 5%, while the Fed is currently predicting that rates in the current cycle will go as high as 5.25% to 5.5%.

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