Fed rate hikes are starting to bite and that’s good for gold

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(Kitco News) – After three months of steep declines, the gold market is seeing renewed bullish momentum. It comes as the US economy has contracted for the second straight quarter.

Economists and politicians are fairly evenly divided on whether or not the United States is in a recession. The National Bureau of Economic Research (NBER) is the agency that would officially declare a recession, which comes after months of research and debate; however, the traditional definition is when an economy contracts for two consecutive quarters.

Despite what politicians and economists might think, consumers are beginning to feel the effects of rising interest rates and persistently high inflation. Data from the US Conference Board this week showed consumer confidence for July fell to its lowest level since February 2021. Growing pessimism is expected to weigh further on growth. Meanwhile, a Twitter poll this week showed that 80% of Kitco News followers think the US is in a recession.

Although we leave the recession debate to politicians and economists, there is no doubt that the US economy is slowing down. The Federal Reserve’s monetary policy is starting to bite and, according to market analysts, it’s good for gold. Suki Cooper, precious metals analyst at Standard Chartered, said on average prices have risen 15% on an annualized basis over the past seven recessions.

Faced with a slowing economy, the US central bank raised interest rates by 75 basis points. At the same time, the Federal Reserve said more aggressive tightening would be warranted if the data supported it.

However, most investors focused on a slight change in monetary policy. Powell also said the tightening is likely to slow as the economy begins to feel the effects of rate hikes.

“At some point it will be appropriate to slow down,” he said. “We loaded up on these very large rate increases. Now we’re getting closer to where we need to be.”

The market now sees the Fed approaching the end of its monetary policy cycle. In a recent interview, John Hathaway, senior portfolio manager at Sprott Hathaway Special Situations Strategy, said he thinks the Federal Reserve’s pivot could come as soon as September as the economy continues to slow.

However, not all analysts are bullish that gold is ready to rally to $2,000 an ounce. On Friday, the US Commerce Department’s Personal Consumption Expenditures Price Index showed inflation holding near a 40-year high at 4.8%.

“If inflation remains high, the Federal Reserve will continue to raise interest rates aggressively, which would limit gold’s rally,” said Phillip Streible, chief market strategist at Blue Line Futures, in this week’s gold survey.

Streible said that with this new rally in gold, he would be looking to take profits at $1,800 an ounce.