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(Kitco News) – The gold market held on to solid gains on Sunday evening after a strong opening fueled by growing concerns that the US banking sector is on the brink of another financial crisis.
The gold market is trading near its highest level in five weeks, although prices have fallen from their session highs, a hair’s breadth from $1,900 per ounce. ounces. April gold futures last traded at $1,881.40 an ounce, up 0.76% on the day.
Financial market headlines have been quite fluid on Sunday evening as the markets opened on news of another commercial bank, New York-based Signature Bank, being closed and taken over by the Federal Deposit Insurance Corporation (FDIC). This was the latest bank decline since the FDIC seized control of Silicon Valley Bank on Friday, the biggest bank decline since the Great Financial Crisis of 2008.
As the risk of contagion spreads, US regulators have stepped up quickly to stabilize markets and reassure jittery consumers. The Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve, in consultation with President Joe Biden, announced that depositors at SVB and Signature would be made whole.
“Today we are taking decisive action to protect the American economy by strengthening public confidence in our banking system,” US Treasury Secretary Janet Yellen, Fed Chair Jerome Powell and FDIC Chairman Martin Gruenberg said in the joint statement. “This step will ensure that the U.S. banking system continues to perform its vital roles of protecting deposits and providing access to credit to households and businesses in a way that promotes strong and sustainable economic growth.”
At the same time, it was noted in the statement that shareholders and certain unsecured debt holders of the two banks would not be protected.
While the government and central bank have moved quickly to calm markets, analysts said this could be the start of a domino crisis in the economy as the Federal Reserve’s aggressive monetary policy begins to weigh on financial markets.
Bond analysts at TD Securities noted that while the fallout from SVB and other smaller banks may be contained, other more significant systemic risks loom.
“After a dramatic period of deposit growth, the Fed increased at the fastest rate since the 1980s. Since then, we have seen a historic decline in bank deposits and unrealized losses on bank bond holdings. Even if SVB is sold, concerns about the liquidity and capital position of the banking system will remain, ” said the analysts.
In the current environment of growing uncertainty, many analysts have said this could just be the start of gold’s rise as investors look for real assets to protect their wealth.
“Trouble in the US financial sector is just beginning and gold has a proven track record of responding to this specific type of crisis,” said Colin Cieszynski, chief market strategist at SIA Wealth Management, in a recent interview with Kitco News.
At the same time, analysts note that due to growing stress in the banking sector, the Federal Reserve may end its tightening cycle before interest rates reach 6%, creating a solid tailwind for gold and silver.
“The Fed should and likely will be more dovish given unforeseen financial volatility,” Nicky Shiels, head of metals strategy at MKS PAMP, said in a research note on Sunday.
Shiels added that she sees upward pressure on gold next week as “markets could get messy.”
Early last week, markets began pricing in the potential for the Federal Reserve to raise interest rates by 50 basis points at the next two meetings. However, these expectations have again changed dramatically.
Analysts at TD Securities said they see the Federal Reserve raising interest rates by 25 basis points on March 22, in line with current market expectations. They added that they see a terminal rate of around 5.75%.
In a recent interview with Kitco News, Chantelle Schieven, head of research at Capitalight Research, said she sees gold prices pushing to all-time highs as the Federal Reserve can’t raise interest rates high enough to bring inflation under control.
“At some point the Federal Reserve is going to have to pull back; you can’t have a banking system in crisis,” she said.
Ole Hansen, head of commodity strategy at Saxo Bank, said that while he is bullish on gold, the precious metal needs to hold gains above $1,883 per ounce. ounce in the near term to signal a sustainable move above $1,900 per ounce. ounces.
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