- Price is rallying as economic outlook worsens
- Inflows likely driven by safe-haven buying
- Traders hope Federal Reserve will hit 'pause'
The gold price pushed above $1,860 per ounce this morning, marking a jump of more than 14% from its November lows and the highest level since the middle of June last year.
The gains look to be driven by a combination of safe-haven demand, fund flows out of crypto-currencies and bets on a slower pace of interest rate rises from the US Federal Reserve.
WHY IS GOLD VIEWED AS A HAVEN?
For many years gold has been considered a ‘bolt-hole’ when markets turn ugly, alongside ‘safe’ currencies such as the Swiss franc and the Japanese yen.
Although it generates no income and it has fewer industrial uses than say silver, gold has always been seen as a ‘store of value’ by many investors.
The gold price tends to have an inverse relationship with the dollar and US interest rates, so the recent weakening of the US currency together with an easing of 10-year Treasury yields has helped the precious metal gain ground of late.
However, despite gold’s rapid rise over the past month, gold ETFs (exchange-traded funds) have actually sold bullion, suggesting funds are flowing into the market from either central banks or algorithmic traders according to specialist commodity research firm SP Angel.
‘Traders may be betting on US jobs data due this week providing signs of easing wage pressure, with the hot labour market a primary driver of current inflation and enabling Powell’s stratospheric rate increases last year’, add the analysts.
HOPING FOR A RECESSION
Although it may seem counter-intuitive, gold bulls will be hoping global economic data continues to worsen so that the Federal Reserve either slows the pace of interest rate rises or pauses altogether in coming months.
The latest global manufacturing PMI (purchasing managers’ index) produced jointly by US bank J.P.Morgan (JPM:NYSE) and index provider S&P Global (SPGI:NYSE) shows global manufacturing continuing to fall last month with output and new orders down sharply on last year.
The index hit a 30-month low of 48.6 in December, but excluding the lows registered during the early months of the pandemic the reading would have been the worst since the first half of 2009.
Traders are hoping that as evidence of a global recession grows, the Fed and other central banks will ease back on their restrictive rate policies.
