Gold Bulls Looking to Play Recession Fears in Europe

James Hyerczyk
3 min read
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Gold futures are trading flat on Wednesday while trying to rebound from an early session test of its lowest level since February 24. Helping to cap the market is a rally in the U.S. Dollar, fueled by expectations of faster U.S. rate hikes and safe-haven buying. Perhaps underpinning prices is the prospect of a global economic slowdown, led by weakness in the Euro Zone.

At 12:54 GMT, June Comex gold is trading $1901.60, down $2.50 or -0.13%. On Tuesday, the SPDR Gold Shares ETF (GLD) settled at $177.34, up $0.29 or +0.16%.

Is Gold Close to Reversing to Upside?

We know with rates expected to rise quickly in the U.S. and expectations of a hawkish Federal Reserve policy throughout the year, this is not the best environment for gold. However, even with the U.S. Dollar soaring to a 2-year high, gold is not falling tick-by-tick with the greenback. This suggests that there may be a major buyer testing the waters.

We’ve seen for years that gold professionals like to by dips into value zones. Well gold is trading in a value area at this time although it is sitting on bottom of a weak support area. So if buyers are going to come in, now would be the appropriate time because of the limited risk. They are not chasing the market higher like the broker-driven, headline reading small speculators. They are looking at a market that is $200.00 dollars off it recent high struck on March 8.

We’re not suggesting to aggressively try to pick a bottom, but we are saying watch for a sign that the shorts are giving up and new buyers are arriving. The best sign of a short-term bottom will be a closing price reversal. This won’t change the main trend to up, but it will signal that the buying is greater than the selling at current price levels.

One New Catalyst to Watch

Let’s assume that next week’s Federal Reserve 50-basis point rate hike is fully-priced into the market. Let’s also assume that similar hikes in June and July are not fully-priced. This opens the door to uncertainty and this could encourage traders to lower the chances of additional aggressive Fed rate hikes.

If something happens between the Fed’s May and June meetings that could derail the Fed’s aggressive plans, then the dollar would weaken. If the greenback starts to retreat on profit-taking, gold is likely to rally. That’s the speculative bet.

And what could happen to change the Fed’s mind? Worries about a slowdown in the economy. Policymakers may not have enough U.S. data to see weakness, but they could react to what is going on in Europe and predict the U.S. economy would be vulnerable.

The European economy remains vulnerable because the war in Ukraine has just moved inside the Euro Zone after Russia halted gas supplies to Bulgaria and Poland. The move by the Russians means the country just took direct aim at European economies.

Russia’s aggressive move can easily cripple the Euro Zone economy, slowing growth enough to make it vulnerable to a recession. If Europe falls into a recession then the U.S. economy would likely weaken. And if it weakens enough, the Fed would quickly back away from aggressive rate hikes. This would benefit gold prices.

For a look at all of today’s economic events, check out our economic calendar.

This article was originally posted on FX Empire

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