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The gold market surged as prices saw their best week in three years amidst the fallout of the banking sector. Analysts are not ruling out a test of the $2,000 an ounce level next week as markets look past the Federal Reserve monetary policy meeting scheduled for Wednesday.
The precious metal rose from $1,867 an ounce to above $1,980 this week, posting a gain of more than $110 and its best performance since March 2020. April Comex gold futures were last trading at $1,988 an ounce, up $65 on the day.
The biggest event markets were gearing up for all week – the Federal Reserve monetary policy meeting – is now on the periphery. Markets are pricing in a 25-basis-point hike for Wednesday, but investors are more focused on the potential pause and rate cuts that could follow.
After wild swings in rate hike expectations this week, the gold market is in a winning position, according to analysts.
“Markets are concluding that we’ll see the Fed go for another 25bps increase and then probably sit on it for a while and see what happens. The view from the gold perspective is that given disruptions in the banking system and the U.S. Treasury Department’s willingness to help, we might get accommodation that allows inflation to hang around longer at a higher level. This is a good thing for gold,” TD Securities global head of commodity strategy Bart Melek told Kitco News.
The consensus in the gold market is that the Fed will have to ease up before inflation is tamed, Melek added. And that is a massive shift in perspective from just a few weeks ago.
Another 25 bps hike might be interpreted as nothing more than a move by the Fed to keep its credibility, said Gainesville Coins precious metals expert Everett Millman. “They don’t want to be seen as abandoning higher rates so quickly,” Millman told Kitco News.
After Wednesday’s decision, the Fed is unlikely to keep raising rates, Millman added. “Something will surely break if the Fed keeps its foot on the pedal,” he said.
What the ECB told us
The European Central Bank raised the rate by 50 basis points this week, holding onto its hawkish stance despite the banking sector worries and market turbulence. RJO Futures senior market strategist Frank Cholly told Kitco News that this gave markets confidence that the Fed would also proceed with its existing plans.
“The market got its answer yesterday when ECB raised by 50 bps. Lagarde hammered the point that inflation has been too high for too long. I don’t think 2% inflation is realistic. They know now they will break some things along the way,” Cholly said.
Fed’s new lending program
The Fed has been helping banks with liquidity issues this week, raising concern that the tightening from last year will be somewhat reversed. According to the latest data from the Fed, banks loaned $164.8 billion from two Federal Reserve backstop facilities this past week.
JPMorgan Chase & Co. estimated that the additional funding from the U.S. central bank’s new ‘Bank Term Funding Program’ could add up to a maximum of $2 trillion in liquidity.
“It puts quantitive tightening on a bit of pause, with more money slashing around,” Melek noted.
And the whole idea does not square with the Fed’s efforts to tighten monetary policy, nor does it bode well in the fight against inflation, said Millman.
BREAKING: #Gold futures surge to 11-month high and now closing in on $2,000 an ounce on strong safe-haven buying heading into an uncertain weekend regarding the banking crisis. April gold up $52.50 at $1,975.80. #kitconews pic.twitter.com/m8Wyd9yo0c
— Kitco NEWS (@KitcoNewsNOW) March 17, 2023
Testing $2,000 an ounce
With the fear of banking contagion risk spreading further, gold is very likely to test $2,000 an ounce next week before seeing some major profit-taking, analysts said.
“I would not be surprised if gold re-tested the highs from last year of above $2,000 an ounce. We can’t see the future, but the banking situation gets more concerning by the day. The Fed is stuck between a rock and a hard place of trying to rescue vulnerable banks and fighting inflation,” Millman explained. “Those two goals seem to be at cross purposes. Hard to raise rates higher without causing more stress in the banking system.”
Melek pointed out that there is no reason why gold couldn’t test $2,000 an ounce next week. “A good portion of this move higher is short-covering. But longs might have started getting in as well,” Melek described.
The next big test for the gold market will be $1,975 an ounce, said Cholly. And if the precious metal gets a close above $1,950 an ounce, the momentum will continue.
Also, the fear of missing out is pushing prices higher, Cholly added. “This is the original fear of missing out. When gold gets cheap, people tend to stay away from it. But when prices go higher, people buy more,” he said.
This is the opposite of what happens with other commodities, which see demand destruction once a certain price level is reached. “I thought gold would reach $2,000 sometime this year. Now, I am convinced it will be over $2,000 and will happen faster than I thought as people begin to chase the market,” Cholly noted.
Next week’s data
Tuesday: U.S. existing home sales
Wednesday: Fed decision
Thursday: U.S. jobless claims, new home sales
Friday: U.S. durable goods orders
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