Gold reaches its highest level in 32 Days amid Global Banking Crisis

Gold Fundamental Analysis
  • XAU/USD had its best week in two months.
  • The bank’s concerns boosted the demand for safe-haven assets.
  • Speculations of a less hawkish Fed and a lower US dollar supported the gold prices.
  • Gold investors are hopeful about a long-term economic recovery in China.

 XAU/USD is trading around 1,947. After the strong price movements of the previous day, the gold price regained some upward momentum and kept its bid tone on Friday. The rising issues in the banking sector and chances for a dovish Federal Reserve were primary drivers. In the last eight trading sessions, gold has posted gains for seven days, a 7.26% increase.

US Banking crisis helping the safe-haven gold

The market’s sentiment changed after Credit Suisse received a lifeline from Swiss authorities, and leading American financial firms joined to help First Republic Bank. These smaller regional banks were on the verge of failure following the collapse of SVB and Signature Bank. On Wednesday, Credit Suisse’s stocks fell by over 30% to a record low of $1.55. But, it recovered 19% losses the next day on the announcement that it would borrow $53.7 billion from the Swiss National Bank. Meanwhile, on Friday, the shares are down again by 10% amid the fresh fears of the global banking crisis.

Furthermore, on Thursday, a group of the leading US banks stepped in to save First Republic Bank, investing $30 billion into the California-based lender. The move was solely made to calm the panic over the banking system’s health amid a back to back bank failures.

The safe-haven commodity, gold, appears to rise amid multibillion-dollar lifelines for struggling banks in the US and Europe. Therefore, the fears of the banking crisis have increased the demand for gold and the price of XAU/USD.

Expectations of Less hawkish Fed added in Gold gains

Meanwhile, the failure of two mid-sized American banks, Silicon Valley Bank and Signature Bank, last week caused traders to reduce their expectations of the Federal Reserve raising interest rates more aggressively.

The US statistics released on Wednesday also showed a trend towards lower producer inflation, which increased hopes that the Federal Reserve could modestly increase interest rates at its meeting.

Therefore, markets are now pricing in a roughly 90% likelihood of a modest 25 basis point (bps) increase at the next Federal Open Market Committee (FOMC) meeting on March 21-22.

Meanwhile, the US Dollar experiences new selling due to predictions for a less aggressive Fed, which seems to be another reason supporting the XAU/USD.

The Dollar Index fell to 104.14 and might decline further as the Fed’s interest rate announcement becomes more uncertain. The yield on US 10-Year Bonds is likewise down, trading at 3.466%.

Looking forward, the preliminary UoM Inflation Expectations, set to release on Friday, will provide a clear direction for the Fed’s interest rate policy because future inflation expectations might emerge as real inflation.

China Economic Hopes strengthened the XAU/USD rally

Recently, investment firm Goldman Sachs raised its forecast for China’s annual economic growth to 6% from 5.5%, citing optimistic indicators following the country’s early-year easing of most anti-COVID policies.

The projection, higher than the 5% gain the Chinese government forecasts, raised expectations that a Chinese economic recovery would drive gold demand this year to record highs.

The XAU/USD investors are particularly bullish due to expectations of a strong economic rebound in China, one of the top consumers of gold.

Ideation without execution is delusion.

Robin Sharma