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Risks of a slowdown in the US make gold a preferred asset class

Gold price started this year on a strong note and is expected to persist with the momentum given the uncertain trade outlook and the recent Fed policy reset.

The US Fed tilted towards dovish stance in January, turning to be patient in terms of future rate hikes. The US central bank also signalled that it would not hesitate to slow down asset sales.

The markets now perceive barely any chance of a rate hike this year, in fact, there is a strong chance of a rate cut in 2020. Credit markets reflect the growing probability of an impending economic slowdown in the US economy.

This can be manifested by an inverting yield curve between 2-year and 1-year Sovereign bonds and 5-year and 2-year as well. Flattening curve between 10-year and 2-year also portend ominous indications for the world’s largest economy.

Although US labor markets remain strong, other sectors like housing and autos are already showing signs of deceleration. To wit, fourth-quarter GDP is now projected around 2.5 percent, 1 percent lower than Q3.

Law of averages for seven decades suggest that the growth cycle in the US is on an average stay put for 32-35 quarters, before recession sets in. The current expansion cycle is already long in the tooth, lasting 36 quarters, beginning from 2010.

Although we do not see a risk of recession, a lower growth trajectory in the next few years seems probable. The US Fed is certainly concerned about slowing global macro backdrop, gloomy trade scenario and fragile financial markets.

Courtesy- Money Control



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