Financial Stress attracts safe haven buying in gold
Posted on Mar 20, 2023 at 12:00 am
Gold has gained almost $100 in the last two trading days. As we all know, the SVB collapse has been the sole reason behind these dramatic movements. And when this was not enough another bank shut down within a space of 72 hours- The Signature Bank.
Global banking shares plunged as a move by the US to guarantee deposits at tech-focused lender SVB failed to reassure that other banks remain financially sound.
The gold market saw great attention coming in from safe-haven trade in a chaotic market environment amid growing fears of contagion from Silicon Valley Bank's (SVB) collapse.
Several gold dealers in Mumbai shared their opinion. “There are two major drivers pushing the gold prices - the financial sector distress and the actions that will be taken by the Fed to overcome this turmoil. Markets are also reassessing interest rate hike expectations ahead of the Federal Reserve meeting on March 22.”
Friday’s market reaction saw a surge in gold buying as the bank's stocks came crashing down. This entire incident put the nonfarm payrolls number on the side and became the main influencer world over. The US authorities decided to step in over the weekend and cover all depositors at the Signature Bank.
Owing to this, there are expectations that the Fed would hold back from increasing interest rates by an outsized 50 basis points next t week. This strain on the banking system and Fed’s efforts to reduce its repercussions has created speculation in the market as to whether the Fed will push ahead with such an aggressive tightening cycle.
Gold jumped tremendously in a day's trading since November as markets went into panic mode and investors tried to seek haven in bullion. This sudden spike is expected to mellow down, once markets get stable, and the Fed succeeds in regularising the situation.
The upcoming US February Consumer Price Index and US Retail Sales reports are expected to be critical for monetary expectations in the gold price today and all these numbers will be monitored closely. However following the unexpected SVB collapse, markets are pricing in a more relaxed stance by the Fed.
The fact of the matter is gold prices this week could swing by $200 in both directions as the trade is already within a very hyper volatile posture leading into a wave of global price report measures this week that are expected to impact the US Fed rate decision on March 22nd. In fact, along with the flight to quality buying interest early today, falling US treasury yields and steep declines in the dollar create a very broad strong bull case for gold which could produce significant upside price action. In retrospect, we are more confident in last week's lows becoming solid value than we are projecting gold reaching $2,000 this week. It should be noted that it has been a very long time since gold was perceived as "the hot market" but that potential is for real over the coming three sessions. Therefore, we suggest traders implement April near the money near to expiration April options against gold positions to ride through potential very wide swings in prices. Pushed into the market, we recommend long positioning over the coming days, but will consider purchasing June Gold puts later this week if prices extend the current rally straightaway.
