Gold nears 7-month peak as recession warnings empower safe havens

By Barani Krishnan

Investing.com -- Move over, risk-taker: The safe-haven trade is here.

The new year has brought along new ominous warnings of recession that have sent gold to near seven-month peaks of above $1,850 an ounce.

Gold futures’ benchmark February contract on New York’s Comex settled at $1,846.10, up $19.90, or 1.09%. The session peak of $1,856.50 was the highest for Comex gold since June 17, marking a 6-½-month high.

The spot price of gold, which is more closely followed than futures by some traders, was at $1,839.45 an ounce by 13:55 ET (18:55 GMT), up $15.50, or around 0.9%. Spot gold’s intraday peak was $1,850.01 — also the highest since June 17.

Gold rallied after the International Monetary Fund said the world’s three main growth centers — the United States, Europe and China — were all experiencing weaker activity as 2023 began, raising the stakes for a global economic slowdown.

“Gold is rallying strongly…and gathering momentum,” Craig Erlam, analyst at online trading platform OANDA, wrote in his daily market note on gold.

“This could be a year in which global growth slows significantly and traders are questioning whether that will warrant monetary policy to be loosened later in 2023. Central banks have pushed back strongly against the idea and I imagine the IMF would too at this point but we could see markets moving in that direction if the data doesn't continue to haunt us.”

In China, particularly, manufacturing activity shrank for a fifth straight month in December, a private survey showed on Tuesday, as the country grappled with an unprecedented spike in coronavirus cases after it relaxed some restrictions intended to prevent the spread of the virus. The figures provide a snapshot of the challenges faced by Chinese manufacturers who now have to contend with surging infections after the country's abrupt COVID policy U-turn in early December.

President Xi Jinping recently said that China’s economy grew 4.4% in 2022 - a figure much higher than markets anticipated. But he also noted that the country faces increased headwinds from the COVID-19 pandemic in the coming months.

In the United States, this week’s greater focus will be on Friday’s U.S. nonfarm payrolls report for December. The jobs report is the first top-tier release of 2023 before next week’s more important Consumer Price Index, or CPI, report.

The jobs report is critical as the Federal Reserve faces a dilemma on whether to keep up with monetary tightening to get inflation to its preferred level or let up on aggressive rate hikes to shield the economy from a slowdown. Higher inflation and rising interest rates have hit the housing sector – and could next hit the labor market, which has shown stupendous growth for the past two years, since the world came off the worst of pandemic. On the other hand, eight nonfarm payroll reports have exceeded economists' estimates, so another positive surprise cannot be ruled out.

Economists expect an increase of 200,000 jobs, which would be lower than the 263,000 reported for November, but still healthy by U.S. labor market standards. Before the pandemic, American jobs grew by just under 200,000 a month.

In order to see salary growth cooling, “the labor market would need to expand at a pace of under 100,000 or even suffer job losses”, said Yohay Elam, analyst at FXStreet.

“In such an ‘as-expected’ scenario, markets would wobble, and the U.S. dollar could gain some ground in response to uncertainty about the Fed's next moves,” Elam added. “The greenback attracts safe-haven flows. However, many investors would likely keep their powder dry ahead of next week's all-important CPI report.”

Gold's rally on Tuesday came despite a rebound in the dollar, further underscoring the relative strength of the yellow metal. All eyes are both gold and the dollar now as traders try to figure out the Fed's rate hikes for this year. The central bank is widely expected to raise rates by 25 basis points when it meets in February, amid increasing signs that U.S. inflation has peaked. Last year, the Fed raised rates by 425 basis points in all.