The Safe-Haven Trade and Economic Uncertainty
The chaos in the Middle East caused by the Israel-Hamas war has propelled gold prices back to $2,000 an ounce. While the safe-haven trade is a significant factor, there is more going on in the market than meets the eye. Gold’s price action on Thursday revealed economic uncertainty beneath the positive façade of economic growth.
Economic Data and Inflation Concerns
Despite U.S. GDP increasing by nearly 5% in the third quarter, gold has remained solidly above $2,000 an ounce. The U.S. core PCE Index shows inflation rising 3.7% in the last 12 months, nearly double the Federal Reserve’s target. The updated University of Michigan consumer sentiment survey also indicates a rise in inflation expectations.
The Federal Reserve’s Monetary Policy Stance
Given these reports, it is expected that the Federal Reserve will maintain its hawkish monetary policy stance. Although interest rates are not expected to rise next week, Fed Chair Jerome Powell is likely to emphasize that the central bank’s work is not done and that interest rates will remain in restrictive territory.
Concerns of Unanchored Inflation and Recession
While geopolitical uncertainty is important for gold, growing fears of a credit event leading to a recession are also impacting its price. Economists and market analysts suggest that the third-quarter GDP numbers may be the last surge of economic activity as inflation and a cooling labor market start to impact consumption.
Implications for the Bond Market
The selloff in the bond market is supported by positive economic growth but is also influenced by weak demand and concerns over the U.S. deficit. There is a growing concern that foreign investors are less willing to buy U.S. debt, leading to higher yields. However, caution prevails as nobody wants to catch the falling knife in the bond market.
Gold as the True Safe Haven
Amidst the economic uncertainty, gold has emerged as the true safe harbor. Despite the potential impact of higher bond yields on the broader economy, gold prices continue to surge. Unless Powell takes unexpected action to cap bond yields, gold’s climb to $2,000 is likely just the beginning.