The gold complex came under more pressure this week as the US, UK and European central banks reaffirmed their willingness to do whatever it takes to combat inflation at the European Central Bank’s annual forum on Wednesday. This was followed by more selling at the end of the quarter on Thursday, even though US 10-year Treasury yields fell below 3%.
During the ECB livestream event from Portugal, Fed Chair Jerome Powell said the central bank was working against time to beat inflation. Powell said Fed policymakers have no choice but to continue raising interest rates to achieve this, although there is no guarantee that it can provide a smooth landing for the economy.
“Is there a risk that we go too far [with rate hikes]? ‘ said Powell. ‘Certainly, there is danger. The biggest mistake we would make, to put it this way, would be a failure to restore price stability.” Powell added that the United States had experienced consistently higher inflation for more than a year, and it would be “bad risk management” to assume that longer-term inflation expectations “will remain firm until indefinitely in the face of persistently high inflation.
The increasingly frustrated Fed chair repeated that bringing inflation back to the Fed’s 2% target would involve “some pain,” but noted that “the worst pain would be a failure to address this high inflation and allow it to continue.”
Overall, talk of a recession grew as US data continued to frustrate and commodity pricing response to the Fed’s deliberate demand destruction. As the world’s largest central bank continues to make adjustments to its “unconditional” fight for price stability, the risks of a recession are becoming more and more evident in the daily macro data.
According to the GDP model now released by the Federal Reserve Bank of Atlanta midweek, the US economy is expected to contract by 1% in the second quarter, down alarmingly from the June 27 forecast of +0.3%. With the Commerce Department showing on Wednesday that US gross domestic product contracted 1.6% for the first quarter versus 6.9% in the fourth quarter of last year, the combined data currently puts the US economy in recession with back-to-back negative quarterly GDP. .
Moreover, the sharp drop in US 10-year Treasury yields this week threatens to cause an inversion of the yield curve between 10-year and 2-year bond yields. A shorter, longer-term yield decline is another sign of stagnation.
In the next day’s US inflation data table, the Fed’s preferred inflation measure was the following day. The Personal Consumption Expenditure (PCE) price index was released on Thursday morning. According to the Commerce Department, core personal consumption expenditures increased 4.7% year over year. Although this is a 0.2 percentage point drop from April, levels are still at a high level not seen since the early 1980s. Headline inflation rose naturally after rising 6.3% year over year and 0.6% from the previous month.
The initial reaction to the PCE data pushed the gold price up towards $1,825 as this report was expected to reduce the size of the next rate hike in late July. But the optimism was short-lived, as bears gained control of the $20 reversal print in the gold price on the last day of Comex trading for the second quarter to close at $1,807.
The recent drop in yields is supporting gold but at the same time, risk aversion is driving commodity prices lower and the US dollar rising. Although gold futures managed to end the second quarter above the key $1800 level, the safe-haven metal posted its worst quarter in five as the US dollar hovered near a two-decade high and posted its best quarter in more than Seven years.
Meanwhile, both the mining complex and silver continue to show relative weakness in the price of gold and closed at their lowest monthly level in two years on Thursday. With the 3-day weekend in the US entering, the price of silver is at risk of losing the psychologically important $20 level.
Moreover, miners’ capitulation selling has been relentless since the phantom hack in the complex in mid-April, reaching “paradoxical dream territory” as we approach the second half of 2022. With investors throwing the towel on risky assets like the Federal Reserve kegs on the path of Dangerous towards an imminent policy error, the oversold mining sector is likely to approach a major bottom.
On Thursday, GDXJ quickly sold off to $32, the 50% retracement level from the August 2020 high of $64, last seen when gold was offered at $1,375 an ounce three years ago. The Small Miner ETF has also closed far from the monthly Bollinger Band support line since its inception in 2009. When combined with the weekly Relative Strength Index (RSI) trading near 30, these are technical indicators that the small miner is closing in a bullish term reversal. near.
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