As the US economy slides into recession, there will be a marked increase in gold demand as investors move cash out of the country and into secure environments. Spot gold prices will rise sharply as investors gravitate towards US treasury bonds and silver, which are typically the safest havens in times of economic or political uncertainty. Spot prices are currently tracking weakness in US Treasury Yields ahead of the Fed meeting scheduled for later this month.
Historically, bond market liquidity has been a key driver of price increases. Over the past year, the spreads between Treasury debt and benchmark index-linked securities (Greece; Japan; Spain) have widened alarmingly. Gains in European debt has triggered financial institutions in other regions, most notably Asia, to buy US debt to spread the risk. These global factors are exerting pressure on bond market liquidity, with traders expecting the spreads to widen further during the second half of this year. This is posing a significant headwind to the US economy, given that any increase in the bond market liquidity is likely to weigh on consumer spending.
The tightening of credit requirements is another factor exacerbating economic headwinds for the US. Tightening credit conditions across the board is stifling lending. Banks are reluctant to lend, with some even closing their doors. Meanwhile, quantitative easing has been pushed aside, causing short term rises in prices of commodities and gold. This, if continued over an extended period, could result in a breakdown in the markets, forcing the Federal Reserve to pump more money into the markets, only to provide temporary relief.
Gold is often thought to be a safe haven when economic headwinds are felt. But if the stock markets and commodity markets take a hit, gold may cease to be a safe haven. Traders expect the spot price to rise above the current level due to an anticipation of greater price hike. However, investors have become leery of the predictability of gold’s spot price, especially as traders become jittery over the possibility that central banks will cut interest rates and other measures that could lower inflation. The spot price is likely to remain subdued until the first few weeks of April.
Economic indicators such as gross domestic product growth, unemployment, consumer sentiment, inflation and other economic indicators do not usually break the gold price. Economic headwinds can be felt by looking at the strength of the US dollar, which has weakened against many other currencies over the last several months. The dollar index tracks global industrial, job and wholesale manufacturing. If there is a drop in manufacturing, it could weaken the US dollar against most major currencies. If wholesale prices are falling, it could benefit the gold market as investors become jittery over the possibility that the central banks will ease monetary policy further, which could reduce global demand for gold.
Gold has become an attractive investment during times when the market is struggling with high levels of unemployment. In addition, economic reports from the US, the UK and other countries have been weaker than expected, causing replacements in stock markets and commodities. Investors have become concerned about their own economic situation, and this worry is likely to lead to a period of weakness in financial markets, with stocks and commodity prices falling further. Gold is usually bought or sold as an asset on the basis of future returns, so if the market is weakening due to weak global growth and high unemployment, the buying and selling of assets will be reduced, reducing the pressure on the metal.
In the past, the gold price has generally tracked economic strength in the United States, particularly as oil prices have been buoyed up over the last year. However, since the summer of 2021, when oil prices rose above the $90 level, the gold price has largely followed the direction of oil prices, with the strong dollar against most currencies acting as a hindrance for increased foreign investment in gold. This is having a significant impact on the gold market, with gold futures prices continuing to fall in response to a less than enthusiastic supply chain environment. In addition, a possible decline in the number of mergers and acquisitions could also have an adverse effect on the gold market, with some analysts predicting that the sector may lose steam over the coming year.
As a result, the current period between bullish months and bearish months in the market has not been kind to the gold price, with shorts traders blaming weakness on global growth worries and the stimulus initiatives of the Federal Reserve. Conversely, gold futures prices have picked up over the past few weeks, and some experts have predicted that a period of consolidation is on the way. With global demand for energy, raw materials and goods rising at a rapid pace, analysts are sceptical about whether the market can sustain the momen