Gold price volatile as key section of U.S. yield curve inverts, Russia promises to de-escalate

(Kitco News) Recession signals were front and center as a key section of the U.S. yield curve inverted and the gold market retreated back to below the $1,920 an ounce level. Markets also digested Russia promising to reduce its attacks on Ukraine and Philadelphia Fed President Patrick Harker stating recession in the U.S. can be avoided.

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

“Gold prices plunged after Russia-Ukraine peace talks yielded some progress. For a moment, it looked like the biggest geopolitical risk could be poised for a major de-escalation and the safe-haven trade was quickly abandoned,” said OANDA senior market analyst Edward Moya.

Russia pledged on Tuesday to curb its attacks on Ukraine, specifically around the capital Kyiv and Chernihiv. The statement comes after Russia-Ukraine talks in Istanbul.

“In order to increase mutual trust and create the necessary conditions for further negotiations and achieving the ultimate goal of agreeing and signing (an) agreement, a decision was made to radically, by a large margin, reduce military activity in the Kyiv and Chernihiv directions,” Russian Deputy Defence Minister Alexander Fomin told reporters.

News of de-escalation boosted risk-on sentiment, pushing U.S. stocks higher, with the Dow Jones Industrial Average rising nearly 1%, the S&P 500 rising 1.2%, and the Nasdaq advancing 1.8% on the day.

A more worrying development was the 10-year and the 2-year Treasury yield curve inverting for the first time since September 2019. This is when long-term debt instruments have a lower yield than short-term debt instruments. The inversion was brief, but markets are keeping a close eye on a more permanent move.

“It looks like Wall Street thinks the economy is still on solid footing even after the 2s10s curve inverted for the first time since 2019. The countdown for a recession starts, but growth should still be strong at the very least for the next few quarters. The inversion didn’t last long but that was somewhat to be expected given how optimistic large parts of Wall Street remain,” Moya said on Tuesday.

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

“The latest easing of tensions comes at a time when rates markets are readying for the Fed to deliver a hawkish surprise to markets,” said commodity strategists at TD Securities. “While the yield curve may be bringing back whispers of a looming recession that could re-ignite investor interest in gold, ETF flows have not historically been strongly associated with the yield curve during a hiking cycle. This suggests that the strong ETF inflows have rather been associated with safe-haven appetite, which leads to downside risks as the negotiators continue to work towards a ceasefire.”

In the meantime, Philadelphia Federal Reserve President Patrick Harker revealed he is not that worried about a recession, adding that the signal sent by the 10-year and the 2-year yield curve is just one of many.

“As a policymaker, I have to look at the combination of all those numbers and come up with a pragmatic path of policy and not base it upon any one number,” he said in comments to the Center for Financial Stability in New York. “I am open to sending a strong signal with a 50-basis-point increase at the next meeting.”