After scaling $US2000 ($2994) per ounce (oz) earlier this week, the gold price could be heading towards a record high amid bank collapses in the US and Europe.
As Silicon Valley Bank crashed and UBS’ acquisition of Credit Suisse was announced, gold turned a corner and raced to a 13-month high.
The US Federal Reserve also raised interest rates a quarter of a percentage point on Wednesday to 4.75–5 per cent, the ninth consecutive rate rise and the highest since 2007. Interest rate hikes wouldn’t typically benefit gold, however there is growing awareness among analysts that rate cuts could be on the horizon.
“The market’s interpretation at this point is that a higher terminal rate is going to translate into sooner cuts, and that is really the focus here … gold prices are likely to rise as the probability of Fed cuts increases as opposed to where the terminal rate lies exactly,” TD Securities commodity strategist Daniel Ghali told Reuters.
Prices have settled below $US2000/oz but overall sentiment is strong for another push from the precious metal.
“We believe the mounting of global financial instability is likely to drive gold prices towards its all-time high of $US2075/oz in the coming weeks, although there is significant resistance around that level as the US dollar remains strong while we believe that contagion risks from the demise of Silicon Valley Bank (SVB) and Signature Bank will be broadly limited,” Fitch Solutions said in a report released on March 20.
“In light of high global financial turbulence, we expect significant price volatility in the coming weeks. Nevertheless, we expect gold prices to remain elevated in the coming years compared to pre-COVID levels.”
Fitch has revised up its average 2023 gold price forecast from $US1850/oz to $US1950/oz, highlighting several factors that are supporting the commodity, including the banking turmoil, the peaking of bond yields and recession fears.
“Falling real bond yields, and a significant drop in rates expectations since the collapse of SVB have driven the gold price rally in March and will continue to support the non-yielding asset gold,” Fitch said of peaking bond yields.
As for recession fears?
“The outlook for the global economy remains grim,” Fitch said. “Our Macro team expects that global real GDP growth will slow from 3.1 per cent in 2022 to 2.1 per cent in 2023.
“Other than the pandemic in 2020, this would mark the slowest pace of growth since the Global Financial Crisis. Amid such a clouded global backdrop, investor interest in gold’s safe-haven status will remain strong.”
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