Gold in 6-Week High of $2,000 on Alarm Over U.S. Inflation/Recession, Ukraine

By Barani Krishnan

Investing.com - Gold is living up to its name again as the asset that investors turn to in times of economic and political troubles.

Prices of the shiny metal hit a six-week high of just above $2,000 an ounce as inflation and recession indicators, along with concerns over the festering Russian invasion of Ukraine, sent alarm bells clanging anew across markets.

Front-month June gold futures on New York’s Comex settled up $11.50, or 1.2%, at $1,986.40, after a session high at $2,000.55. June gold rose 1.7% last week, adding to the previous week’s 1.2% gain.

Monday’s spike in gold came as the yield on the U.S. Treasury’s benchmark 10-year note peaked at 2.884%, a level unseen since December 2018, when it stood at 3.050%.
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The last time gold got to above $2,000 an ounce was on Mar. 11, a fortnight after the start of the war in Ukraine that heightened geopolitical risk across markets. Since then gold had also been volatile, tumbling to as low as 1,888.30 on Comex on March 29.

Interestingly though, Monday’s run-up came as the Dollar Index broke above 100 the first time since the COVID-19 outbreak, with its last high above that level registered in May 2020. The two typically move inversely, and there was no telling if that negative correlation had truly snapped and will not immediately return.

“There’s a degree of both economic and political concerns in today’s gold rally as the geopolitical implications from Ukraine can escalate out of nowhere,” said Phillip Streible, precious metals strategist at Blue Line Futures in Chicago.

“But I think inflation is the bigger factor over concerns that an aggressive Fed response could tip the US economy into recession. Also, the inverse dollar-gold relationship is not a given. What’s more important is how worried investors are about things, and all focus now is whether we will avoid a recession.”

Unrelenting inflation pressure has forced policy-makers at the Fed, or Federal Reserve, to embark on the fastest pace of interest rate hikes in 40 years to measure up to price growth.

After slashing rates to nearly zero at the height of the coronavirus outbreak, the Fed’s policy-making Federal Open Market Committee, or FOMC, approved the first pandemic-era rate hike on Mar. 16, raising rates by 25 basis points, or a quarter point

Many FOMC members have concluded since that the hike was too tame to rein in inflation galloping at its fastest pace since the 1980s, and that more aggressive increases of 50 basis points may be needed over their next few meetings beginning with the one on May 4-5.

The Fed’s typical target for inflation is just 2% a year — a level it considers “neutral”. To get to this, the central bank envisages that it will need six more rate hikes this year — one every monthly FOMC meeting from now.

Investors fear that the end-result will be recession. The last time the U.S. economy experienced a recession, which is technically defined as two straight quarters of negative growth, was during the height of the COVID-19 outbreak between March and September 2020.