On Monday (20.03), the price of an ounce of gold briefly broke through the US$2,000 level. We have only seen similar levels twice in history: in August 2020 and March 2022. However, let's discuss what factors are driving the current bullion price rises and what we could expect in the future?
Problems in the banking sector
The problems of Swiss bank Credit Suisse and fears of a crisis in the US banking system, which we have covered in earlier commentaries, appear to have increased risk aversion among investors, which may have fuelled demand for so-called safe assets, i.e. gold, among others.
Following the collapse of three US banks and the loss of liquidity by Credit Suisse, the Fed responded by providing liquidity support to the banking system. It concluded a liquidity support agreement with the largest central banks. The acquisition of Credit Suisse was in turn announced by its main market competitor, thereby guaranteeing solvency support. These actions may have calmed the situation somewhat, as the listing of the Financial Select Sector SPDR Fund (XLF), which gives exposure to US banking sector companies, seems to illustrate.
It appears that the key factor for the situation in the financial sector would be today's Fed interest rate decision and Chairman Jerome Powell's conference. According to FedWatch, gathering analysts' predictions, as many as 87% of them expect an interest rate hike of 25 basis points today, up to 5%. As risks to the economy's key banking sector have increased, most analysts have revised their expectations for the timing of the Fed's peak in interest rate hikes from September to May this year in just two weeks. Moreover, 46% of the analysts surveyed believe that we could see the first rate cut as early as July this year. It seems that higher-than-expected hikes could negatively affect the banking sector and, consequently, we could then expect a further increase in risk aversion, and this could be beneficial for the price of gold bullion.
Source: Conotoxia MT5, XLF, Daily
Central banks purchases
Central banks play an important role in managing gold reserves and are significant holders of gold bullion. Data on gold reserves, compiled using International Monetary Fund statistics, track central banks' reported purchases and sales of gold and the percentage of gold in their international reserves.
In 2022. China and Turkey were the biggest buyers of gold, but Turkey is struggling with economic problems and inflation. In China, on the other hand, the central bank has made further gold purchases, but this cycle may end or be curtailed as the government has announced an expected economic growth rate of 5% and an expected recovery of the economy after the move away from the restrictive zero COVID policy. These factors could affect the decline in gold demand.
Source: Changes in Q4 2022 gold reserves, https://www.gold.org/goldhub/data/gold-reserves-by-country?gclid=Cj0KCQiA-oqdBhDfARIsAO0TrGFBGpXIevzQzm3eU3oSb35CrWrgLw-h445BSQNAiWhLcZfNW4UQyQYaAsvTEALw_wcB
Grzegorz Dróżdż, Market Analyst of Conotoxia Ltd. (Conotoxia investment service)
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