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Gold price extends rally after data shows unexpected contraction in US economy

Inflation weighed on US consumer spending for the second consecutive quarter. Stock image.

Gold prices continued to climb on Thursday as a contraction in the US economy boosted its safe-haven allure. The rally was also driven by a less aggressive tone from the Federal Reserve, which raised interest rates by another 75 basis points earlier this week.

Spot gold rose 1.2% to $1,755.65 per ounce by 1:45 p.m. ET, extending its gains from the previous session. Three-month gold futures were up 1.8% to $1,749.60 per ounce in New York.

[Click here for an interactive chart of gold prices]

Bullion’s rally comes after the US economy unexpectedly shrank for the second straight quarter, pushing both the dollar and Treasury yields lower and clouding the outlook for further aggressive interest rate hikes.

Data showed consumer spending grew at its slowest pace in two years, with business spending also declining, which could fan market fears that the US economy is already in recession.

After the GDP data confirmed recessionary fears, traders anticipate the Fed will be slower to introduce rate hikes, boosting the appetite for gold, Phillip Streible, chief market strategist at Blue Line Futures in Chicago, said in a Reuters report.

In an earlier statement, Fed Chairman Jerome Powell said the Federal Open Market Committee “is strongly committed to returning inflation to its 2% objective,” repeating language that it’s “highly attentive to inflation risks.” Powell also said officials would set policy on a meeting-by-meeting basis rather than offer explicit guidance on the size of the next move.

“Wall Street is convinced that the Fed will likely pivot to a slower pace of tightening in September,” Ed Moya, senior market analyst at Oanda Corp., said in a message to Bloomberg.

“The unexpected contraction of the US economy means that both the peak in Treasury yields has been made and a bottom has been formed for gold. The stagflation playbook is bullish for gold prices and that appears how many traders will be positioning themselves going forward,” Moya added.

“The absence of a specific timeline pertaining to the moderation of interest rate hikes still carries some form of vagueness,” said Yeap Jun Rong, market strategist at IG Asia Pte. “Gold prices are riding on the hopes that with it being brought up by Powell at the meeting, some consideration is in place and moderation could come sooner rather than later.” 

“That said, the Fed has maintained its clear focus on taming inflation and the upside risks to inflation clearly remains,” said Yeap. “This carries the risk of any inflation persistence ahead keeping the pressure on for the Fed to continue on its hawkish path and put a cap on gold prices’ upside.”

(With files from Bloomberg and Reuters)