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Fear of recession will support gold prices

19 January 2023 200
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On Wednesday, the gold prices continued downward correction, unloading the overbought condition after the growth of this year’s first two weeks. But this time, the fall was rather modest — less than 0.3%. As soon as the quotations fell below the round level of 1900, the "bulls" immediately began to buy the declined asset, and by the end of the day prices remained above this level.

Despite the wave of pessimism that took over the stock market, gold is in a more confident position. The main precious metal finally began to uphold its reputation as a safe-haven asset, which had been questioned last year because of the metal’s unimpressive dynamics. Now the fear of recession coming in Western economies will rather support the gold quotations, or at least relieve them from any serious pressure.

Fears of economic crisis intensified as a result of yesterday's release of updated statistics on the U.S. economy. A negative trend in retail sales became stronger, with a decline by 1.1% registered in December, while it was previously forecasted to decrease by 0.8% only. Industrial production also showed a further decline of 0.7% (while the expectations were of 0.1%).

In fact, the labor market remains the only source of positive statistics on the U.S. economy. If it starts to show a downward trend too, the Fed will have to not just slow down, but stop its cycle of monetary policy tightening. It’s necessary to be reminded that today, as usual on Thursday, we are monitoring the number of new jobless claims.

Some U.S. regulator officials are already willing to vote for keeping rates unchanged at the Fed's spring meetings. At the moment, they remain in the minority, but if the negativity of economic statistics continue to strengthen, their number will clearly increase. And this combination of pausing interest rate hikes along with inflation remaining high is a very favorable growth factor for gold.

The recent correction in gold prices aided in eliminating the overbought condition of technical indicators. For a new wave of growth, it’s necessary to reach the previous local high slightly above the level of 1925.

The following trading strategy version could be offered:

Buy gold in a range of 1895–1905. Take profit – 1925. Stop loss – 1890.

Traders may also use Trailing stop instead of a fixed Stop loss at their convenience.

This content is for informational purposes only and is not intended to be investing advice.

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