Gold Prices Reach New Heights Amid U.S. Banking Crisis
On Monday, the price of gold (XAU/USD) rose, reaching a one-month peak after a recent drop.
This increase in gold prices was fueled by market expectations that the ongoing banking crisis in the United States would compel the Federal Reserve to adopt a more accommodative approach, thereby softening its previously hawkish stance.
Following Silicon Valley Bank’s failure, the dollar experienced a decline against a basket of currencies, and the yield curve inversion lessened.
If there is a real banking and credit crisis, gold will be +50 to +$100 per oz and we will be at all time highs within a week.
— Wall Street Silver (@WallStreetSilv) March 12, 2023
This incident prompted the market’s reevaluation of U.S. interest rate expectations. It also hastened regulators to restore trust in the banking system.
As per Fed Fund futures prices, most traders now predict a 25 basis point hike by the Federal Reserve this month. It is lower compared to the initial estimate of a 50 bps increase.
This change in market expectation toward less aggressive interest rate hikes in the coming months caused a rise in gold prices.
At 02:00 GMT, spot gold increased by 0.6% to $1,878.92 per ounce. Moreover, gold futures rose by 0.9% to $1,883.25 per ounce.
— Investing.com (@Investingcom) March 13, 2023
Over the weekend, the Federal Reserve implemented emergency measures to ease borrowing for struggling banks.
In addition, the White House assured Silicon Valley Bank depositors that all withdrawals are secure.
Federal Reserve Interest Rate Hike
ING analysts believe the Fed’s prompt response prevented a more severe problem. However, it lowered the probability of a 50 basis point rate increase at the March FOMC meeting.
The failure of Silicon Valley Bank highlighted the deepening fractures in the US economy caused by rapidly increasing interest rates.
In more than five decades, the Federal Reserve pursued its most aggressive rate-hiking campaign to combat spiraling inflation.
However, the escalating yields raised the opportunity cost of holding non-yielding assets, putting significant pressure on metal markets.
Nevertheless, the potential for a less hawkish Fed spurred broad gains in metal prices.