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Gold Forecast: Bullion Bid on Recession Risk, Inverted Yield Curve

Gold Forecast: Bullion Bid on Recession Risk, Inverted Yield Curve

2020-02-23 00:45:00
Rich Dvorak, Analyst
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GOLD FORECAST, GOLD PRICE NEWS & ANALYSIS – SUMMARY

  • Gold price action notched a 7-year high last week as bullion and precious metals caught bid following the latest deterioration in market sentiment
  • Spot gold has potential to climb higher with recession risk growing more prominent due to the ongoing coronavirus outbreak
  • The price of gold could remain bolstered by plunging interest rates on 10-year Treasuries and an inverted yield curve rates and an inverted US Treasury yield curve

Performance of precious metals this year – measured by spot gold (XAU/USD) and silver prices (XAG/USD) – outpace US stock market benchmarks like the Dow Jones Index. Since December 31, gold and silver prices have gained8.29% and 3.55% respectively since December 31 whereas the DJIAhas edged 1.59% higher as of the February 21 close.

Learn more about strategies and tips behind trading the gold-silver ratio!

It was recently noted that gold price outlook brightened due to rising volatility in the wake of a new coronavirus outbreak (i.e. COVID-19).

Not only has the number of confirmed coronavirus cases grown exponentially, the festering international public health crisis has taken the lives of many – particularly in Wuhan, China where the outbreak originated.

Also, the China virus has sent a crushing shockwave across the global supply chain, which was just highlighted in the latest Markit PMI report.

US Yield Curve Inversion Gold Forecast

Market participants responded to news that business activity across the US services sector contracted to a 76-month low with a violent anti-risk move out of equities and into safe-haven assets (e.g. gold and US Treasuries).

Check out this key insight on how to trade gold!

As traders reacted to the corresponding rise in recession risk, the US yield curve inversion deepened, and the price of gold spiked.

However, can the precious metal prolong its advance after skyrocketing to its highest level since February 2013 last week?

GOLD CHART BREAKOUT HITS 7 YEAR HIGH – WHERE TO NEXT?

Spot gold price chart gold forecast

Chart created by @RichDvorakFX with TradingView

A monthly gold chart reveals the underlying momentum behind gold’s steep climb since mid-2018.

After the impressive breakout from technical resistance underpinned by last year’s high, spot gold prices quickly propelled higher above the psychologically-significant $1,600 per ounce level.

{{SENTIMEN|GC|Learn how to use gold sentiment in your trading strategy}}

Among the fundamental catalysts likely steering the price of gold higher,slowing global GDP growth and the underlying risk that a recession looms stand out as most prominent.

PRECIOUS METALS BOLSTERED BY RISING RISK OF RECESSION IN 2020 AMID CORONAVIRUS OUTBREAK, TREASURY YIELD CURVE INVERSION

Recession Risk Chart Gold Forecast

Aside from the slow-and-steady flattening of the US Treasury yield curve, which just inverted again for the fourth time this year along the 3-month and 10-year maturities, the google search popularity of “recession” in the United States has climbed steadily higher since the end of December.

Is it a coincidence this happens to align with Christmas time when American families frequently gather to celebrate the holidays – and perhaps casually discuss the economy?

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Due to perceived risk of recession and rekindled recession odds, most recently fueled by the mounting economic toll of the coronavirus outbreak, bullion will likely remain in demand.

Although, an optimistic shift in this gloomy narrative currently hanging over the market and in the back of investors’ minds could occur and cause the latest advance in spot gold prices to unwind.

GOLD PRICE SURGING ALONGSIDE PLUNGING 10 YEAR TREASURY YIELD & CLIMBING VOLATILITY

Gold Price Chart Forecast Bolstered by 10 Year Treasuries

Chart created by @RichDvorakFX with TradingView

That said, sustained investor demand for safe-haven assets like gold, silver or US Treasuries looks to help spot prices keep pushing higher. The yield on US government bonds could continue falling if traders remain in risk-aversion mode, which might be matched by jumping market-priced probabilities of future FOMC rate cuts.

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Due to the generally strong negative correlation between gold prices and interest rates, another nosedive in the 10-year Treasury yield stands to bolster bullion even higher. Also, elevated readings of volatility across the broader market might provide support to precious metals.

Nevertheless, the price of gold has potential to reverse recent gains. A healthy retracement could occur if coronavirus concerns – and recession risks – cool down after the latest flareup.

-- Written by Rich Dvorak, Junior Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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