Gold Recovers as Misplaced Optimism Fades

Ibeth Rivero

Unemployment levels will remain high until the end of the year and the economic recovery may take some time. 

Gold Futures dropped 3.23 percent last week, as risk appetite fades in the markets given the shattering expectations for a V-shaped recovery. Despite the weekly gains, Gold lost some ground against the dollar on Friday, while US Stocks recovered some of the lost ground by closing the week on the negative side.

Last week the Federal Reserve Chairman, Jerome Powell announced the bank's intention to keep the interest rates at low levels as long as it's needed, highlighting that recovery may take some time and that unemployment levels will remain high until the end of the year.

Powell, who nevertheless remains optimistic regarding the future of the US economy, said that the heavily expected recovery may take more time than expected, shattering any expectation for quick recovery.

“It may take a while. It may take a period of time. It could stretch through the end of next year. We really don’t know,” he said during an interview with the CBS.

Powell highlighted that assuming there's not going to be a second wave of the epidemic, the economy will recover steadily in the second half of this year, hence it may not be wise to bet against the US economy in the long-run and even in the medium-run.

economy will recover steadily

The Federal Reserve's expectations regarding the unemployment level are also not the most encouraging. The Bank expects that at the end of the year unemployment will remain at 9.3 percent, which is close to the worst levels of the 2008 crisis despite being over the current 13.3 percent. Even more so, the bank expects that unemployment will fall to 5.5 percent at the end of 2022 and will only come back below the 4.1 percent level in the long term.

The US President, Donald Trump disregarded the Federal Reserve's comments, claiming that the institution is "wrong so often" and that 2021 will be one of the best years for the United States economy.

"I see the numbers also, and do MUCH better than they do," commented Trump on his Twitter account, "We will have a very good third quarter, a great fourth quarter, and one of our best ever years in 2021," he added, highlighting his hopes for seeing a vaccine for the coronavirus soon, something that Powell considers is essential for a full economic recovery.

The World Bank confirmed Powell's comments, as it foresees that the global economy won't come back to the pre-coronavirus levels until 2022.

Another factor that is causing unease in the markets is the fear of a second wave of the epidemic. At the moment, the possibility for this event is being downplayed by several US government officials, including Dr. Anthony Fauci who commented that having a second wave is not inevitable and that it depends on whether the outbreak is approached in a proper way.

However, it's a fact that some of the states that are now amid the process of reopening their economies are reporting spikes in the number of infections, among them Florida. In the global scene countries like Australia and Israel are already reporting an increase in the daily coronavirus cases, which causes many to ask whether imposing a lockdown may be needed again to contain the virus.

At the moment, there are about 7,884,772 coronavirus cases worldwide and a death toll of 432,638. The United States leads the list of the most affected countries, with 2,142,224 reported infections and a death toll of 117,527, followed by Brazil and Russia.

The geopolitical situation is not good either.  China's attempt to intervene in Hong Kong was not well received by the international community, increasing the tensions and even the fears for a trade war.

Some analysts consider that last weeks' enthusiasm for risk was misplaced, so according to this approach what happened in the gold markets makes sense, now that the markets are more aligned with the economic reality. After all, when optimism fades traders and investors tend to favor safe-haven assets.

Nevertheless, just as Powell said, we don't really know about the future, so it wouldn't be surprising to keep seeing intermittent misplaced optimism dominating the markets.

Ibeth Rivero

Ibeth contributes daily market commentary in both English and Spanish (both of which she speaks fluently) and she also manages the DailyForex mobile app to ensure that traders around the world are getting important market updates in real time.

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