Gold: Rally on the Cards as Economic Downturn Gathers Pace

Business activity declined sharply in December. It signals an upcoming recession – a time that suits particularly well.

The economic downturn is gathering pace. The flash US Output Index came at 44.6 in December, down from 46.4 in November. It was the sharpest decline in business activity since May 2020, excluding the initial pandemic period, since the Great Recession. The strong decrease in new orders drove the decline in business activity, as and higher interest rates dampened demand.

Both services and manufacturing are suffering. The Flash US ecl-106US Business Activity Index registered 44.4 in December, compared to 46.2 in November. The fall in the services was the fastest in four months and among the quickest in the series history that started in October 2009.

Meanwhile, the Flash US ecl-829USManufacturing PMI posted 46.2 in December, down from 47.7 in November. It was the fastest downturn since the initial pandemic period in 2020, which was driven by one of the sharpest declines in new orders since the global financial crisis of 2008-9.

PMI Signals Recession

There is a silver lining to the report. The inflationary pressures softened importantly at the end of Q4 2022. The Fed’s tightening cycle seems to have the desired effect on inflation. However, it comes at significant economic costs. Inflationary pressure subsided partially because of the weakening demand.

In other words, the PMI shows that a recession is coming! Actually, according to Chris Williamson, Chief Business Economist at S&P Global Market Intelligence: Business conditions are worsening as 2022 draws to a close, with a steep fall in the PMI indicative of contracting in the fourth quarter at an annualized rate of around 1.5%.

Implications for Gold

What does it all mean for the gold market? The softening inflationary pressure combined with the economic downturn is fundamentally positive for gold and silver prices. They imply that the U.S. monetarUSlicy will be less and less hawkish and more and more dovish. Additionally, the recessionary conditions should, at some point, increase the safe-haven demand for gold.

So far, the price of gold has fluctuated slightly below $1,800, as the chart above shows. It may decline further amid a still hawkish Fed or the rush towards cash during the initial phase of the next economic crisis. But when this period passes, gold could rally amid recessionary or even stagflationary worries.