U.S. GDP contracts, gold prices recover

Emily Lauderdale
Emily Lauderdale
GDP recovery
GDP recovery

The U.S. economy contracted by 0.3% in the first quarter, according to the preliminary GDP report released on Wednesday.

This missed the expected annualized growth rate of 0.4% and marked a significant slowdown from the 2.4% expansion seen in the previous quarter. The negative GDP reading is expected to play a crucial role in the Federal Reserve’s upcoming interest rate decision on May 7.

The Fed and its chairman, Jerome Powell, have faced criticism from President Trump, who claimed he knows more about interest rates than Powell. This ongoing dispute is likely to draw more attention as the Federal Reserve deliberates on its next move. Gold prices initially dipped after President Trump’s executive order to ease tariffs on car parts, as part of ongoing trade negotiations, signaling progress in the talks.

However, the price of gold (XAU/USD) recovered to around $3,288 following the negative GDP report. Investor sentiment towards gold remains cautious amidst these developments.

During the first quarter, investors flocked to gold-backed exchange-traded funds (ETFs) as a hedge against global trade tensions, adding about 227 tons of bullion and driving prices to record highs.

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However, diminishing trade tensions could mean a decline in the gold rally.

Technical analysis indicates that while gold is holding some key support levels, the possibility of a breakout to the downside remains, especially if future US economic data continues to show weakness.

Gold’s cautious rally amid slowdown

The key resistance levels for gold are $3,322 and $3,344, with support at $3,295 and further down at $3,245. The correlation between GDP and gold prices is complex. Typically, a higher GDP growth rate leads to economic expansion and inflation, prompting central banks to increase interest rates.

Higher interest rates make gold less attractive due to the higher opportunity cost of holding non-yielding bullion versus other investments. Thus, strong GDP growth is usually a bearish indicator for gold prices. Recent data shows that the Personal Consumption Expenditures (PCE) index also rose sharply, which helped the U.S. dollar maintain its strength despite the weak GDP numbers.

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This resilience of the dollar has been a headwind for gold prices, as the stronger dollar makes gold more expensive for buyers using other currencies. Looking ahead, the Federal Open Market Committee (FOMC) is expected to maintain the current target range for the federal funds rate at its meeting on May 6-7. Market pricing implies only a 9% probability of a rate cut, indicating that the Fed is likely to adopt a cautious approach in response to recent economic data.

The gold market is at a crossroads with technical indicators suggesting potential volatility ahead. The interplay between GDP data, trade developments, and Federal Reserve actions will be key factors influencing the direction of gold prices in the near term.

Photo by; Pixabay on Pexels

By Emily Lauderdale
Emily is a news contributor and writer for SelfEmployed. She writes on what's going on in the business world and tips for how to get ahead.

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