Bullion prices have skyrocketed since the United States’ banking crisis erupted a week ago with the Federal Deposit Insurance Corp’s takeover of two mid-sized lenders, Silicon Valley Bank and Signature Bank, after depositors withdrew billions of dollars from them fearing for their solvency. Despite receiving a $30 billion cash infusion from a bank consortium, a third bank, First Republic, is also in trouble.
This week’s insane gold rally demonstrates that more people are turning to gold as a safe haven and store of value as the banking credit crisis worsens and spreads. The banking crisis has spread to Europe, forcing Credit Suisse Group, one of the most recognisable names in global investment banking, to seek assistance from Switzerland’s central bank. The Federal Reserve’s consistent interest rate hikes have also raised concerns that the US economy will enter a deep recession. Whatever direction the central bank takes now could be beneficial to gold.
Just last week, markets were pricing in a 50 basis point March rate hike after FOMC Chairman Jerome Powell told Congress that the Fed was willing to accelerate rate hikes if data warranted it. At the start of this week,market positioning shifted dramatically, with the probability of no change in rates rising above 50%. By mid-week, the likelihood of a 25 basis point increase had risen to 90 percent. Having said that, a 25 basis point increase appears to be the most likely outcome.
If the Fed stops raising interest rates, gold should benefit because it puts a short-term cap on the dollar. If inflation remains stubborn and the Fed is forced to resume tightening, the economy will suffer severely and gold will see a surge in safe-haven demand.
So, in nutshell, following are the points that have led to record high prices in gold:
• Banking crisis in US
• Expectation of spread of banking crisis to other countries
• Falling Yields
• Falling Dollar Index
• Safe-heaven buying
• Expectation of Interest rate pause
• Expectation of Recession in US
When there is a crisis of confidence, especially in our financial system and banking sector, people seek safe havens. And gold is arguably the most well-known safe haven in the world. It’s one of the best assets available, with no counterparty or credit risk. In other words, unlike a bank, gold cannot go bankrupt, which is very appealing at this point in time.
Next week is very crucial for precious metals prices as there is FED meeting on Wednesday. Gold still has steam left to head towards $2000 (Rs 60000) before FED Wednesday meeting. If FED turns dovish (hints for pause in interest rate hike) in the meeting, gold rally is expected to head towards $2070 (Rs 62000). Meanwhile, if FED turns hawkish (raises interest rate by 50 bps), we could see profit booking from high levels.
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