Gold climbs to $1982.8 as investors rethink banking crisis and dovish Fed

Gold futures hit the highest value of 2023, clearing the former high of $1976 hit in February. As of 4:09 p.m. EST, the most active April gold futures contract is up $58.10 or 3.02% and set at $1981.10. Although the weakness in the dollar contributed to today’s dramatic rally, it was only a small factor in a much bigger picture. Considering gold futures posted a net gain of over 3% and the dollar weakened 0.52%, roughly 5/6 of today’s gains in gold are directly attributable to market participants offering the precious yellow metal on the upside.

Next Tuesday, the Federal Reserve will hold its second Open Market Committee meeting of the year. This will be followed by a statement from the FOMC and a press conference by Chairman Jerome Powell the next day, March 22.

However, this FOMC meeting will be quite different in that there is one more major element that needs to be considered in their decision which they will announce next Wednesday, March 22nd. Not only will the Federal Reserve continue to be laser-focused on bringing down inflation, which remains sticky or persistent in many sectors, but they must now factor in a banking crisis that was first reported the last week.

On March 10, 2023, reports began to surface of Silicon Valley Bank bankruptcy after a depositor-run bank challenged solvency and led to an inevitable bankruptcy announcement today. SVB was unique in that its core business was to fund venture capitalists and technology start-ups. To raise capital, they liquidated a large portion of their assets on their balance sheet with a loss of $1.8 billion.

Immediately, the FDIC and banking regulators stepped in to ensure that depositors’ money would become available. Then, yesterday, 11 major US banks set up a $30 billion fund held at First Republic Bank to create a safety net to maintain the solvency of banks like SVB and Signature Bank of New York. Federal banking regulators have applauded the support of this major banking group as it validates the resilience of the banking system in the United States.

That brings us to next week’s FOMC meeting. The Federal Reserve is expected to approve a ¼% rate hike, with the banking crisis ultimately supporting the view that the Federal Reserve will step up rate hikes with a ½% rate hike next week. Although it was rumored that the Fed might take a break, many analysts believe the Fed needs to keep raising rates even with the banking crisis to maintain credibility.

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Wishing you as always good exchanges,

Gary S. Wagner

Disclaimer: The opinions expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure the accuracy of the information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. This is not a solicitation to trade commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article accept no responsibility for loss and/or damage resulting from the use of this publication.

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