Gold climbs as weakening US economy signals slower rate hikes

GOLD climbed after the US economy shrank for a second consecutive quarter, pushing the US dollar and Treasury yields lower, and clouding the outlook for further aggressive interest rate hikes as the Federal Reserve fights inflation. 

Bullion rallied as much as 1.2 per cent to a 3-week high after a report on Thursday (Jul 28) showed that US gross domestic product (GDP) fell 0.9 per cent in the second quarter as inflation weighed on consumer spending. The Fed raised rates by 75 basis points on Wednesday, and chairman Jerome Powell said while a similar move was possible again, the pace of hikes will slow at some point. 

“Wall Street is convinced that the Fed will likely pivot to a slower pace of tightening in September,” Ed Moya, senior market analyst at Oanda Corp, said in a message. “The unexpected contraction of the US economy means that both the peak in Treasury yields has been made, and a bottom has been formed for gold. The stagflation playbook is bullish for gold prices, and that appears how many traders will be positioning themselves going forward.”

Spot gold gained 0.9 per cent to US$1,749 an ounce at 10.17 am in New York. The Bloomberg Dollar Spot Index was little changed after losing 0.6 per cent in the previous session. Silver and palladium advanced.

The Federal Open Market Committee “is strongly committed to returning inflation to its 2 per cent objective”, it said in a statement, repeating language that it is “highly attentive to inflation risks”. Powell said officials would set policy on a meeting-by-meeting basis rather than offer explicit guidance on the size of the next move.

The traditional haven is still heading for a fourth straight monthly loss as recent US dollar strength and rising interest rates have combined to dim the precious metal’s appeal. Holdings in bullion-backed exchange-traded funds are headed for the biggest monthly drawdown since March 2021.

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Gold rises as dollar, yields slip after Fed hike, Powell comments

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“The absence of a specific timeline pertaining to the moderation of interest rate hikes still carries some form of vagueness,” said Yeap Jun Rong, market strategist at IG Asia. “Gold prices are riding on the hopes that with it being brought up by Powell at the meeting, some consideration is in place and moderation could come sooner rather than later.” 

“That said, the Fed has maintained its clear focus on taming inflation and the upside risks to inflation clearly remains,” added Yeap. “This carries the risk of any inflation persistence ahead, keeping the pressure on for the Fed to continue on its hawkish path and put a cap on gold prices’ upside.”

Meanwhile, demand for gold jewellery may slip till 2022 due to weaker economic growth in the biggest markets of China and India, said the World Gold Council. Physical demand helps provide a floor for prices. BLOOMBERG