Gold Bulls Celebrate U.S. Recession; Big Week, Fourth Month in Red

"Ignore the bubbly, how long will this last?" - critics of gold may be heard posing questions. 'Of course!' Bulls in space react as evidence suggest that the yellow metal's ascent may not be as transitory as champagne fizz.

As the U.S. economy entered a recession, gold prices reached their highest point in five months. In addition, it closed the month of July in the red, after three straight months of losses.

The World Gold Council, which is typically bullish on gold, described its outlook for the second half of the year as "mixed" at best.

Despite solid demand in the first half of the year, investment demand, particularly from exchange-traded funds, may end the year at the same level as in 2021, according to the World Gold Council. The WGC forecast at the end of the first quarter that the annual investment demand for gold would climb by more than 200 tonnes.

The council emphasized that "a probable lowering of inflation despite aggressive monetary policy tightening" and a strong currency "may possibly provide headwinds for investment via ETFs and the OTC market."

But the WGC also brought positive news to gold aficionados. In the event of a recession, lower equities and fixed income assets may provide upside potential for gold as a safe haven, it was said.

Despite the fact that commodity markets, such as oil and copper, are weakening, the sector as a whole remains "precarious and further [price] hikes cannot be ruled out," the research said.

Gold futures for August delivery on the New York Comex increased $12.60, or 0.7%, to $1,762.90, after hitting a session high of $1,768.65.

Gold prices in August rose by 2.1% for the week, the largest gain since the week of February 25 when they rose by 4.2%.

The most active December gold contract on the Comex closed the day at $1,781.80, $12.60 higher than the expiring August contract. December's peak price for gold was $1784.60.

According to gold's price charts, the yellow metal might continue to soar to $1,800 if the dollar and bond yields fall more in reaction to projections of fewer Federal Reserve rate hikes for the remainder of the year.

Ed Moya, an analyst at the online trading platform OANDA, said that the possibility of a one-percentage-point rate increase by the Federal Reserve has long ago gone. "Gold is on the rise now that Treasury interest rates have hit their peak. The persistence of stagflation should be beneficial for gold prices. Gold could once again draw safe-haven flows so long as Wall Street anticipates a slower pace of Federal Reserve tightening.

Gold prices rose this week after the Commerce Department reported on Thursday that the U.S. gross domestic product expanded by a negative 0.9 percent in the second quarter, after a fall of 1.6 percent in the first quarter. As a result of successive negative quarters, the economy has officially entered a recession.

Separately, the Commerce Department reported on Friday that the Personal Consumption Expenditure Index, an inflation indicator closely monitored by the Federal Reserve, rose 6.8 percent in the year leading up to June after being unchanged for two months, intensifying the central bank's fight against price inflation.

The jump in the PCE in June indicated that inflation remained consistently above four-decade highs and that the Fed may not be done with the huge rate increases it has enacted this year to battle price inflation. Since March of this year, the central bank has raised interest rates four times, with the last two increases of 75 basis points being the most in 28 years.

Gold is supposed to be a hedge against inflation, but it has failed to live up to this reputation for the bulk of the previous two years, especially since it surpassed $2,100 per ounce in August 2020. This is due, in part, to the 11 percent rise in the Dollar Index this year, which follows a 6 percent rise in 2021.

The dollar, a contrarian trade to gold, has fallen almost 1 percent against a basket of six other major currencies over the last two days.