U.S. GDP shrinks unexpectedly! Can gold make a comeback?

On Thursday (April 28), data from the Bureau of Economic Analysis of the U.S. Department of Commerce showed that the U.S. real GDP in the first quarter was -1.4% quarter-on-quarter, lower than market expectations of 1%, and far lower than the fourth quarter of last year. 6.9%; inflation-adjusted first-quarter GDP was -0.4%. It was also the weakest quarter for the U.S. economy since the early days of the pandemic in April 2020. After the release of the data, the US dollar index fell by nearly 20 points in the short-term, and spot gold recovered slightly and closed at $1,895.47.

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Although the market was prepared for the poor data performance, the negative value was more than many expected. A sharp slowdown in growth in the world's largest economy will lead to fears of a recession that could spread and spark a broad-based risk aversion. In this case, gold bulls may find some temporary relief.

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U.S. gross domestic product unexpectedly fell 1.4% in the first quarter, marking a sudden reversal of the U.S. economy from its best performance since 1984. In the first three months of 2022, a combination of factors affected economic growth. Rising infections of the Omicron variant have hampered economic activity at the start of the year, while inflation has soared to its highest level since the early 1980s and the Russian-Ukrainian conflict has brought the economy to a standstill.

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Previously, with the strengthening of the Fed’s expectation of raising interest rates and shrinking the balance sheet, the US dollar index has maintained its growth momentum after breaking through 100, hitting a new high since December 2002. Since April, the US dollar has risen by 6.6%, the best monthly rate since the end of 2016. gain.

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The strong performance of the dollar is directly related to the Fed's aggressive interest rate hikes to curb inflation. Moreover, compared with the central banks of the G10 group, the Fed's monetary tightening policy is more aggressive, resulting in the high yield of US bonds gradually attracting the attention of overseas funds.

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At present, the Fed continues to shift towards tightening the currency, and the balance sheet reduction agenda has begun. It was also proposed in the previous meeting that the upper limit of the scale reduction will be raised in three months or longer. From the two rounds of scale expansion and reduction, it can be seen that the difference is mainly in the magnitude and rhythm, which is for the price of gold. A bearish factor. The unfavorable factors of gold price are specifically in three aspects: exchange rate, holding cost and real interest rate. At present, the main factor supporting gold price is risk aversion.

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At present, the US dollar index is in a relatively high state, but there is still a growth range in the shrinking cycle, and the strengthening of the US dollar will bring certain pressure to the gold price. In the short term, the U.S. dollar index has a negative relationship with the price of gold, but the negative relationship is not so obvious in the long run.

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In the past year, the price of gold and the U.S. dollar have tended to move in the same direction. In terms of hedging functions, the two have certain similarities, but a strong U.S. dollar will also suppress the price of gold. The weakening of the negative relationship between the price of gold and the real yield of U.S. bonds is due to the market’s concerns about international geopolitics, which represents the market’s demand for safe-haven. In the future, the real yield will tend to rise in the case of interest rate hikes.

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Valuing gold from the current real interest rate, the reasonable price of gold should be around 1400-1500 US dollars, which is as much as 400 US dollars difference from the current actual value, which represents the market's premium to the gold price's hedging function. The risk aversion in the current market is heavier, and the price of gold has been decoupled from real interest rates. If geopolitics improves, it will bring a certain degree of pressure on gold prices.

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The Federal Reserve is expected to take a more aggressive policy response next week, with the largest rate hike expected since 2000, as inflation hit a four-year high. But others believe that this round of aggressive rate hikes by the Fed will trigger a recession. The Fed is faced with the dilemma of slowing the economy enough to control inflation, but not enough to cause a recession.

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With inflation at the highest level in 40 years, some U.S. investors are starting to worry about the dollar’s ​​waning purchasing power and are choosing to hoard gold as a hedge against the risk that the situation could worsen.

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Swiss gold shipments to the U.S. surged in March to their highest level since May 2020, Swiss customs data showed. Separately, gold holdings in gold ETFs rose by 185 tons in March, worth about $15 billion, the most since July 2020, according to the World Gold Council.

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More Americans are turning to gold as an alternative currency as the U.S. government's unprecedented spending and the Fed's easing policies threaten to further erode the value of the dollar. U.S. dollars in circulation stood at $2.25 trillion, up from $1.80 trillion in early 2020 and just over $800 billion in 2007, according to Federal Reserve data.

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While gold has not challenged the dominance of the US dollar, several innovations that allow daily transactions in gold are rapidly driving its frequency. To some extent, the interest in gold currencies overlaps with the cryptocurrency movement, which has gained popularity in part because of the desire to create a decentralized financial system.

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Although it is not easy to shake the detached status of the US dollar, it is a fact that it is gradually de-dollarized, which means that the underlying logic that dominates the global financial market is changing. Historically, the Dutch guilder, the French franc, the British pound and the American dollar have been replaced for a long time, and the view of using gold as a currency may only be recognized in a small range.