Gold climbs almost 2% as Fed rate hike increasingly resembles one of the great economic blunders

In a theme that seems to be recurring this year, gold was one of the lone bright spots on Wall Street as stocks stumbled deeper into bear territory and key economic indicators are all but screaming a recession in the U.S.

Gold rose by almost 2% on Friday, breaking the $1,090 barrier and trading near $1,089 early afternoon. We have had a good start to the year, with prices trying to consolidate into a higher range between $1,080 and $1,100, ActivTrades chief analyst Carlo Alberto de Casa said.

Chinas stock losses as well as oils continued decline below $30 sent fresh shock waves though U.S. markets and bolstered golds appeal. A recovery in bullion is prompted by the equity weakness overnight in China, and its been reinforced by the declines today, HSBC gold analyst James Steel told Bloomberg.

U.S. stocks were in the red Friday, with the Dow losing more than 500 points at the depths of its decline, while the S&P 500 broke below its Aug. 24 low, which several market strategists said would be tantamount to a major sell signal, MarketWatch noted.

So far in 2016, gold has acted as a fear asset as money has been flowing out of stocks, crude oil and copper, confirmed Taki Tsaklanos of Investing Haven.

U.S. economic momentum is slowing so quickly that the Atlanta Federal Reserve has once again slashed its fourth-quarter GDP estimate from 0.8% to 0.6%.

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Retail, manufacturing data tumble: U.S. stocks also were pressured by some dismal U.S. data that suggest the economy is falling into a recession-level malaise. Although Christmas is supposed to be the gift that keeps on giving for retailers, the monthly figures jolted analysts. Sales at U.S. retailers declined in December to wrap the weakest year since 2009, raising concern about the momentum in consumer spending heading into 2016, Bloomberg reported.

There isnt anything encouraging in this report, Jefferies economist Thomas Simons said of the 0.1% drop.

And just as jarring was a key report on the manufacturing sector, the Empire Fed survey, which printed a disastrous -19.37 the largest miss on record, Zero Hedge noted, recalling that the last time Empire Fed crashed to these levels was theimmediate aftermath of the Lehman bankruptcy and the global financial crisis and the peak of the recession in 2001.

Adding to the grim picture was news that U.S. industrial production plunged 1.8% year-over-year the fastest pace of collapse since May 2008 and a level that has never not produced a recession; U.S. producer prices fell in December, confirming that the Fed is falling short of its 2% inflation target; and Walmart announced that its closing 269 stores and laying off as many as 16,000 workers.

Fed already balking at more hikes: So, whats the gist of all these recessionary indicators and plunging stock indexes? Four weeks and one market meltdown later, the Feds decision (to raise interest rates in December) no longer looks quite so clever, Londons Guardian newspaper argued. Indeed, if things continue as they have since the turn of 2016, the increase in U.S. interest rates will go down in the annals as one of the great economic blunders.

Indeed, the slaughter in stock markets already seems to have the Fed backtracking on its announced tightening plans. St. Louis Fed chief James Bullard suggested Thursday that very substantial plunges in oil prices could influence the central banks hiking timetable, which its top officials have said could occur four times this year.

But maybe not, now. On Friday, New York Fed head William Dudley apparently indicated that if the U.S. economy weakens enough, the bank would consider not raising rates but imposing negative interest rates, in which banks charge fees on deposits to encourage monetary velocity. Negative rates would be wildly gold-bullish.

And Global Macro Investor publisher Raoul Pal went so far as to predict the Fed will be reversing course entirely because of deepening economic woes. If you look at S&P earnings, for example, they have not been at these kinds of levels ever outside of a recession, he told CNBC on Wednesday. There are so many indicators that were in a recession. You see global growth and its suggesting that the market should go lower and its based on the fact that the global economy is getting worse.

Because of this, Pal predicted the Fed will be loosening policy rather than continuing to tighten. I dont think itll be QE next time; I think itll be something else. Negative rates, some sort of targeted fiscal stimulus by the Fed, Pal said.

Although no one can be happy about the plunge in stocks and the deeper implications of the slowdowns in China and the U.S., those holding gold can take some measure of solace in the notion that the yellow metal is responding positively to current market turmoil, and if the Fed is forced to reverse course, the sky could be the limit for bullion prices as the implications of a Fed mea culpa sink in.