What Does a US Recession Imply for the Gold Price?

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Natalie Dempster, the Investment Research Manager at the Council, has produced a paper that studies the performance of gold in recessionary conditions and one of the primary conclusions is that regression and correlation analysis suggest that there is no relationship between changes in US GDP growth and changes in the gold price. A US recession, therefore, would not have negative implications for the gold price.

The most recent figures from the United States suggest that the first quarter GDP came in at +0.9%, an upward revision from the flash estimate of 0.6%. At first pass this is encouraging, but closer inspection shows a rather gloomier picture. Much of the growth in the real GDP figure was due, in the words of the US Department of Commerce, to an upturn in inventory investment that was partly offset by a deceleration in the Personal Consumption Expenditure (PCE)". Positive contributions also came from exports of goods and services, federal government spending and private inventory investment, while the durable goods PCE was negative, as was residential fixed investment (which should not come as a surprise), which dropped by 26%. Inventory adjustments contributed 0.2% to the GDP figure while the automotive sector shaved off 0.4%.

Without the underpinning from durable goods, therefore, and with the latest Consumer Sentiment Index registering a 28-year low, the words "stagflation" and "recession" are again populating the vocabulary of market commentators. This makes one of the latest pieces of research from the World Gold Council partially interesting.

Natalie Dempster, the Investment Research Manager at the Council, has produced a paper that studies the performance of gold in recessionary conditions and one of the primary conclusions is that regression and correlation analysis suggest that there is no relationship between changes in US GDP growth and changes in the gold price. A US recession, therefore, would not have negative implications for the gold price. This is a reflection of the unique drivers of the gold market, and underpins the advection of gold's role as a diversifying asset, even in times of recession.

The World Gold Council analysis notes that both macro data and the Federal reserve's rapid loosening in monetary policy, both in terms of interest rate shifts and the massive injections of liquidity, suggest that the US is "at serious risk of, or possibly already in, a recession"...

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