As the Federal Reserve begins a cycle of aggressive tightening to bring inflation under control, investors are worried about the state of the U.S. economy and what the bond market is saying. And also, accordingly, the price of gold reacts.
One of the most popular indicators of the health of the U.S. economy is the yield curve, which appears to be approaching inversion after a volatile week in the bond market that is revisiting Fed expectations, including a 50 basis point interest rate hike in May.
Economists pay attention to the yield of 2-year and 10-year Treasury bonds.
If the yield curve inverts—when long-term debt yields are lower than short-term debt yields—it could herald a recession. And all of this is happening at a time when a slowdown in growth looks inevitable due to the upcoming aggressive tightening of the Federal Reserve's monetary policy.
The culprits behind the latest rise in yields were market fears about the Fed's hawkish stance on tightening monetary policy. This week, Fed Chairman Jerome Powell said that inflation is too high, respectively, now it is possible to raise interest rates by 50 basis points.
At its March meeting last week, the Fed raised interest rates for the first time since 2018 by a quarter-point.
Goldman Sachs also revised its forecast after Powell's speech, now forecasting two 50 basis point increases in May and June meetings and then a 25 basis point increase in the remaining four meetings of the year.
For gold, higher yields mean downward pressure and limited upside potential. But due to recession fears, gold's appeal as a safe haven is gaining momentum, especially against the background of the geopolitical situation in Ukraine.
According to OANDA senior market analyst Edward Moya, the rise in stocks has completely dampened the demand for safe-haven assets.
On Wednesday, gold rose against the background of rising oil prices and a sell-off in the stock market. Brent crude topped $120 a barrel while U.S. oil surged above $114 a barrel:
Meanwhile, the Nasdaq fell 0.9%:
Dow fell 1.2%:
S&P 500 fell 1%:
