Gold Surges to $1,982 as Investors Rethink the Banking Crisis and Accommodative Fed
The comments below are an edited and abridged synopsis of an article by Kitco News
Gold futures surged recently, taking out the former high of $1,976 achieved in February. On March 18, the most active April contract of gold futures was up $58.10 (3.02%) and fixed at $1,981.10. Although US dollar weakness contributed to the dramatic ascent, it was a small factor in a much larger picture. Considering that gold futures had a net gain of over 3% and the dollar softened by 0.52%, roughly 5/6 of the gains in gold made on March 18 are directly attributable to market participants bidding the yellow metal higher.
On March 21, the Fed held its second Open Market Committee meeting of the year. This was followed by an FOMC statement and press conference by Fed Chair Jay Powell.
That meeting was different in that there was an additional major component that will be announced on March 22. Not only will the Fed continue to focus on reducing inflation, which remains persistent in many sectors, but now it needs to factor in a banking crisis.
Although it has been rumored that the Fed might pause rate hikes, many analysts believe that it needs to continue to raise rates, even with the banking crisis, to maintain its credibility.
On March 10, 2023, the Silicon Valley Bank failed after a bank run by depositors, leading to a bankruptcy announcement. SVB was unique in that its primary business was funding venture capitalists and start-up tech companies. To raise the capital it needed, it liquidated a major portion of its assets on the balance sheet at a loss of $1.8 billion.
Immediately the FDIC and banking regulators stepped in to guarantee that depositors’ money would be available. Eleven major US banks created a $30-billion fund, creating a backstop to keep banks like SVB solvent. Federal banking regulators applauded this banking group because it validates the resilience of the US banking system.