The Eurozone is facing a recession and the gold price is climbing. Both events are driven by a dramatic fall in manufacturing in the eurozone and a renewed interest in the precious metal.

Preliminary data showed inflation in France slipped in December from a record high

French inflation eased back in December from a record high, according to preliminary data. Headline inflation fell to 6.7%, lower than an average Reuters poll forecast of 7.2%, but still well above the record level of 10.1% in November.

In Germany, headline inflation eased in December for the second month in a row. The year-on-year HICP declined to 9.6% from 11.3% in October, though it was in line with the lower Spanish figures released last week.

Energy price inflation, which had soared in recent months, declined for a second month in December. While gas prices remain historically high, wholesale gas prices fell across Europe in recent weeks.

The German 10-year yield was 2.28% on Wednesday, down from a peak of 2.568% early in the week. It is a drop that is unlikely to help ECB officials, although it adds to the evidence of prices peaking.

Core inflation remained strong, rising to 5.2% from 5.6% in November, according to the ECB. This measure strips out volatile food and energy components, and shows sizable increases in both goods and services.

European bond prices remain the best indicators of the coming recession

Europe is facing recession and a gold rally. In the near term, the economy is dampened by higher energy costs and greater uncertainty. On the longer term, the economic outlook will remain subdued. However, there is a potential for a’soft landing’. This could benefit risk assets, though the implications for gold are mixed.

Gold has enjoyed a six-month rally and is at its highest price in almost two years. Its price performance is driven by a range of drivers, but the market’s most obvious driver is the slowing global economy. Several countries have already entered into recession, including Italy and Turkey.

Inflation remains elevated, and there are signs that the pace of central bank tightening is slowing output. Meanwhile, global populist fervor continues to escalate.

Disruption of supplies of Russian energy is another major downside risk. This could lead to further production cuts and potentially higher prices for energy and other commodities.

War in Ukraine is a key driver of the euro area’s weakened economy. While the conflict has eased some of the bottlenecks, the effects on the economy are still significant. If war continues, supply-side constraints could increase and push up consumer price inflation.

The dramatic fall in eurozone manufacturing also sparked renewed safety-related interest in gold

The ol’ ole dollar sign is still a solid bet. Fortunately, there are other alternatives in the crock of gold department, such as hedge funds and ol’ fashioned mutual funds. As a side effect, gold prices have retraced in the past year or two, but that’s a story for another time.

Although the eurozone’s sluggish economic recovery has largely sputtered out, there are plenty of reasons to be bullish on the region in the long term. One of the biggest drivers of the eurozone’s recovery is the emergence of a new generation of tech and service oriented companies that will be more than happy to fill the void. Also, the euro is the only currency area that has not regressed since the recession of 2008-2009. A renewed sense of optimism is a good thing. If anything, a rekindled European renaissance could bring a boost to the entire EU economy. It’s a good thing, because the European Union is also home to the likes of some of the world’s most innovative and ambitious countries.

US hiring numbers and hawkish Fed minutes could pile more pressure on the precious metal

The eurozone faces a recession and gold is rallying as a result. According to Goldman Sachs’ Chief Economist, Jan Hatzius, both the euro area and the UK are in recession.

In a Reuters poll, the majority of economists expect the Fed to raise interest rates by 50 basis points in September. However, the Fed’s Chair Jerome Powell suggested that the central bank is open to cutting rates should trade issues stymie economic growth.

Meanwhile, the Eurozone’s manufacturing PMI came in at the lowest level in seven years. This has stimulated safety-related demand for gold.

However, there is some downside risk to gold’s rally. If earnings miss expectations, a market reaction could ensue. That said, wage pressures remain moderate.

As a result, the Fed is likely to maintain a “sufficiently restrictive” policy in the near term. But the risk of a recession continues to rise, due to the tighter financial conditions.

On top of that, global bonds and stocks are suffering from selling off. Global stocks and bonds have only sold off two other years since 1990.