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The financial markets, including stocks, precious metals, and foreign exchange, have been impacted by the economic downturn. Economic imbalances emerged after the COVID-19 pandemic as a result of rapidly rising inflation. Inflation has reached a 40-year record high, and the Federal Reserve has been raising interest rates in multiple steps, moving above 4%.

These higher interest rates exacerbated systemic issues, and inflation has blown out of control. The high inflation and interest rates may remain over the long-term, and together they seem to indicate the potential of a recession. The upcoming recession would probably take gold prices higher.

The Consumer Price Index (CPI) can be used to measure inflation, as shown in the chart below. The chart indicates that CPI is currently declining from its recent peaks. The 12-month CPI values for December have decreased to 6.42% from 7.11% in November, but these readings are still considered rather high.

In contrast, real GDP growth slowed to 0.96% in 2022, the lowest rate since the pandemic of 2020. However, nominal GDP, unadjusted for inflation, slowed to 7.32% as a result of a 6.28% rise in prices. This decline in GDP was due to the base effect, with quarterly GDP remaining relatively stable at 0.72%.

Recession is Imminent

Recession and high inflation can occur concurrently because both are caused by economic imbalances. High inflation causes a recession because it indicates that the economy is overheating and that the demand for goods and services is excessive. This resulted in businesses increasing prices to offset rising costs, which decreased consumer spending as goods and services became more costly.

In addition, high inflation has caused interest rates to rise above 4%, making borrowing more expensive and deterring investments. This eventually led to a decline in economic growth.

Therefore, persistently high inflation is an indicator that a recession is imminent, and it can also contribute to its development. The possibility of a recession is indicated by the negative yield curve. This curve is proved to be the most trustworthy indicator. The recession examples are shown in blue circles on the chart below.

During economic downturns, the price of gold rises as investors seek safe-haven assets that maintain value. This is because gold is regarded as a store of value and a hedge against inflation and currency devaluation.

It is important to note, however, that the relationship between gold prices and recessions is not always that straightforward. The relationship varies based on the specifics of the recession. Currently, higher interest rates are having a negative impact on the US dollar index. The US dollar has already reached its long-term resistance in 2022, and it may continue to decline in 2023. The negative US dollar will increase gold demand further in 2023.

Gold Technical Evaluation

A few weeks ago, this gold chart was presented with a strong bullish outlook. The chart below depicts the formation of a falling wedge, which is a strong bullish pattern. The bullish pattern aimed for the levels between $1,975 and $2,000 in a matter of weeks.

At $1,820, where we also executed a long trade in the market, the red neckline was broken. The gold price shot higher toward the target of the falling wedge after the breakout of the neckline.

The updated chart below demonstrates that the price has already been seen trading near the target, and it has the potential to reach the target region between $1,975 and $2,000. Given the economic outlook and the dollar index’s weakness, it is likely that gold prices will increase further. However, the long-term price congestion between the $1,680 and $2,075 levels will only be broken if the gold market breaks above the $2,075 pivot.

Conclusion

The fourth quarter's GDP grew at an annualized rate of 2.9%, indicating a slowing economy. The negative yield curve indicates the potential of a recession. The high interest rates are causing a decline in CPI values, but inflation is not yet under control. Therefore, additional rate hikes are expected in 2023.

The reaction of gold prices to rising inflation and interest rates is real, and it is probable that the gold market may soon break higher. During the upcoming pullback in the gold market, investors will likely enter new positions. 

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