Gold prices volatile as key section of US yield curve inverts, Russia promises de-escalation

(Kitco News) Recession signals were front and center as a key section of the US yield curve inverted and the gold market retreated back below the $1,920 an ounce level. Markets also digested Russia’s promise to scale back its attacks on Ukraine and Philadelphia Fed President Patrick Harker said a US recession could be avoided.

Comex April gold futures closed the session down more than $20 on the day and last traded at $1,917.90 after briefly dipping below the $1,900 an ounce level.

“Gold prices plummeted after Russia-Ukraine peace talks made some headway. For a moment it looked like the biggest geopolitical risk could be poised for a major de-escalation and safe-haven trading was quickly abandoned,” said OANDA Senior Market Analyst Eduard Moya.

Russia on Tuesday pledged to stem its attacks on Ukraine, particularly around the capital Kyiv and Chernihiv. The statement comes after talks between Russia and Ukraine in Istanbul.

“In order to strengthen mutual trust and create the necessary conditions for further negotiations and achievement of the ultimate goal of reaching agreement and signing (an) agreement, the decision was made to radically and by a large margin reduce military activities in the direction of Kyiv and Chernihiv reduce,” Russian Deputy Defense Minister Alexander Fomin told reporters.

News of a de-escalation fueled risk appetite and pushed US stocks higher, with the Dow Jones Industrial Average up nearly 1%, the S&P 500 up 1.2% and the Nasdaq up 1.8% on the day.

A more worrying development was the inversion of the 10-year and 2-year Treasury yield curves for the first time since September 2019. This occurs when long-term debt has a lower yield than short-term debt. The reversal was brief, but markets are watching a more permanent move closely.

“It looks like Wall Street thinks the economy is still on solid footing after the first 2-10 inversion since 2019. The countdown to a recession is beginning, but growth should still be strong for at least the next few quarters. The reversal didn’t last long, but that was somewhat to be expected given how optimistic much of Wall Street remains,” Moya said Tuesday.

Investors’ main concern is that the Federal Reserve will hurt economic growth as it aggressively tightens monetary policy this year.

“The recent easing comes at a time when rates markets are braced for the Fed to aggressively surprise markets,” said commodity strategists at TD Securities. “While the yield curve may bring back rumors of a looming recession, which could reignite investor interest in gold, historically ETF inflows have not been strongly linked to the yield curve during a tightening cycle. This suggests that strong ETF inflows have more likely been linked to safe-haven appetites, leading to downside risks as negotiators continue to work towards a truce.”

Meanwhile, Philadelphia Federal Reserve Chairman Patrick Harker admitted he’s not overly concerned about a recession, adding that the signal sent by the 10-year and 2-year yield curves is just one of many may be.

“As a policymaker, I have to look at the combination of all these numbers and find a pragmatic policy path and not base it on a number,” he said in a comment to the Center for Financial Stability in New York. “I’m open to sending a strong signal with a 50 basis point raise at the next meeting.”

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