Gold futures are edging higher on Monday shortly before the regular session opening. The market is being underpinned by dampened demand for higher risk assets on concerns about a potential U.S. recession. Helping to put a lid on those gains are a slight rise in U.S. Treasury yields and small rebound in U.S. equity markets.
At 09:52 GMT, June Comex gold futures are trading $1323.20, up $4.50 or +0.34%.
Fueling demand for gold is a plunge in U.S. Treasury yields. The drop in yields was triggered by last week’s dovish announcements from the U.S. Federal Reserve. Central bank policymakers left interest rates unchanged and signaled it would take a pause in further rate hikes in 2019. It also lowered its growth forecast for the United States citing pressure from a weakening global economy.
Yields fell further on Friday after data showed German manufacturing contracted further in March, compounding fears that unresolved trade disputes are exacerbating a slowdown in Europe’s biggest economy.
The steep drop in Treasury yields caused the yield curve to invert when the 10-year Treasury yield slipped below the 3-month Treasury yield for the first time since mid-2007. Historical studies show that this inversion could lead to a recession in the future and this has investors concerned. Shares in Asia and the U.S. plunged early Monday on these developments, driving investors into safe-haven gold.
Speaking at the Credit Suisse Investment conference in Hong Kong, Chicago Federal Reserve Bank President Charles Evans made a series of remarks about Fed policy and the U.S. economy. Here are the highlights:
Evans said the U.S. economy is in a strong position. He further added that he is not concerned about inflation and that the Federal Funds rate is arguably close to neutral. Additionally, he said that monetary policy is neither accommodative nor restrictive at this point. He also said the yield curve inversion is very narrow.
Most importantly, Evans said it’s a good time for the U.S. central bank to pause and adopt a cautious stance even though the economy remains in a strong position. His comments were among the first by policymakers following the Fed’s decision last Wednesday to signal an end to its tightening after it abandoned plans for further rate hikes in 2019.
Gold prices will continue to be influenced by the direction of U.S. Treasury yields and U.S. equity prices. A further deterioration in Treasury yields will increase fears of a recession. This will continue to increase gold’s appeal as a safe-haven asset. Further weakness in demand for riskier assets will also drive up demand for gold.
The size and duration of the rally will likely be determined by how much money bullish investors are willing to bet on the chances of a recession. According to data from the U.S. Commodity Futures Trading Commission, investors raised their bullish wagers in COMEX gold in the week to March 19, after reducing positions for nearly a month.
This article was originally posted on FX Empire
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