Do Gold Prices Reflect Recession Fears Or Continued High Inflation Expectations

gold price per gram Precious Metal Investors

In his Daily Market Notes report to investors, Louis Navellier wrote: 

What Does Gold At All-Time Highs Say?

Are interest rates lower because inflation is trending down or because of recession fears? Economic numbers are trending lower, both activity and prices. This has led to forecasts that the Fed is close to the end of its year of aggressive rate increases and closer to an expected serious relief rally when this is confirmed.

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Q1 2023 hedge fund letters, conferences and more

These same weak numbers, however, elevate fears of the US, and the world overall, may be sinking into a recession. Another question is whether gold now at all-time highs reflects recession fears or continued high inflation expectations. 

The Fed Put Is Alive And Well

There appears to be a continued belief that the “Fed Put” is alive and well, that the Fed will quickly cut rates before inflation comes close to their stated 2% target, if the economy slows significantly. The recent quick reaction to provide liquidity to address the Silicon Valley Bank crisis revealed for the right reasons that the Fed will use its balance sheet to calm financial difficulties, so why not interest rates too? 

Today, the soft manufacturing numbers lowered yields across the curve, with the US 2-year yield dropping 12bps to 3.71%, as low as it’s been since September ’22, before many Fed rates increases since, and hugely lower than the over 5% it hit less than a month ago. This lower rate has taken the US dollar index to below 101.5, as low as it’s been since April ’22, good news for US companies’ foreign sales and earnings conversion back to US dollars for reporting purposes.

An Important Bellwether

Confirmation of inflation trends will be posted like clockwork on a monthly basis, while prospects of a recession are best seen in earnings trends and while estimates continue to come down remain positive. This makes the upcoming 1Q23 earnings season an important bellwether as it will reflect both the impact of the higher rate environment and the ability to push through price increases.

For now, investors in both stocks and bonds have solid gains YTD, and until earnings drop materially, will likely continue to have a good year.       

Coffee Beans

While baseball is often referred to as “America’s favorite pastime”, American football has long surpassed baseball as the nation’s favorite sport to watch, with 65% of Baby Boomers (born between 1946 and 1964) follow baseball, while just 44% of Millennials (1980-1994) and 36% of Gen Zers do the same. Source: Statista. See the full story here