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Gold Transfixed on Talk of Brazen Fed, Inevitable Recession

Published 28/06/2022, 21:06
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By Barani Krishnan

Investing.com -- Neither the bulls nor bears are making much headway with gold these days.

The yellow metal has entered into one of its classic go-nowhere trading ranges that has seen it stuck pretty much in a $20 band over the past 10 trading days.

Front-month gold futures for August on New York’s Comex settled down $3.60, or 0.2%, at $1,821.20 an ounce.

The benchmark U.S. gold futures contract has meandered between $1,820 and $1,840 since June 17 with longs and shorts both being unable to move the needle on the twin winds of Fed hikes and recession talk that has shaped the narrative in markets.

“Commodities are increasingly being spooked by the recession ghost with recession fears driving the overall decline,” said Ole Hansen, head of commodities strategy at Copenhagen-based Saxo Bank.

Federal Reserve policymakers on Tuesday promised further rapid interest-rate hikes to bring down high inflation, but pushed back against growing fears among investors and economists that sharply higher borrowing costs will trigger a steep downturn.

"Many are worried that the Fed might be acting too aggressively and maybe tip the economy into recession," San Francisco Fed President Mary Daly said in an interview on LinkedIn, reproduced by Reuters. "I am myself worried that left unbridled, inflation would be a major constraint and threat to the U.S economy and continued expansion."

The Fed, she said, is therefore "tapping the brakes" by raising interest rates to cool demand.

After leaving interest rates unchanged at between zero and 0.25% for two years during the coronavirus pandemic, the Fed has raised them since March, bringing key lending rates between 1.5% and 1.75%. The central bank has said it will continue with its rate hikes until inflation, running at 40-year highs of more than 8% per annum, returns to its target of just 2% per year.

Economists, however, fear that under the quantitative tightening approach, the Fed will push the economy into a recession with its aggressive rate hikes and planned sale of hundreds of billions of dollars of bonds in its holdings.

This month’s 75-basis point, or three-quarter percent point, increase by the Fed was the highest in 28 years. The economy contracted by 1.4% in the first quarter of the year and will technically slip into a recession if it does not return to positive growth by the end of the second quarter.

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