Investors are embracing the gold market amid growing fears of banking contagion. Strong demand for the precious metal keeps prices at a 5-week high on Wednesday. Analysts interpret the market and share their forecasts.
Institutional investors are returning to the gold market
The banking sector was shaken Wednesday as shares of Credit Suisse, a Swiss bank with extensive US and global operations, tumbled 31% before cutting the losses to 20%. This was the largest one-day sell recorded and managed to push European and US stocks down. Gold is trading above $1,900 and is up 5.5% since the start of the year, as the global market disruption fueled fears of more significant fallout.
“We expect this banking turmoil to stimulate investor demand over the long term,” says Daniel Hynes, senior commodity strategist at ANZ. Demand for the precious metal is on the rise, with more than 300,000 ounces added to physically-backed gold ETFs in the last trading session, according to Bloomberg data. This was the biggest increase since June. And analysts say this may be just the beginning of the institutional investor’s return to the gold market, with much more upside potential for the price.
“This could turn into a significant boost for gold”
The key trigger analysts are watching is whether the Federal Reserve will pause the rate hike cycle as soon as next week. This is something that markets are currently discussing. According to the CME FedWatch Tool, the Fed has a 58% chance of keeping interest rates steady on March 22. Daniel Ghali, senior commodity strategist at TD Securities, comments:
The risks of the tightening cycle ending will realign discretionary flows with strong physical flows. This could turn into a significant increase for gold. Yellow metal still seems to offer the most competitive risk/reward on our screen.
JP Morgan forecasts gold to hit $2,000 this year
Hareesh V, head of commodities research at Geojit Financial Services, says investors are now waiting for new clues as they seek a safe asset in the wake of the banking crisis that triggered gold’s recent rallies. It also describes Thursday’s slight pullback as a technical correction.
Overall, gold has also been bolstered by the easing in the rival safe-haven dollar, making it cheaper for overseas buyers. In a note, JP Morgan analysts highlight:
Long-term, gold’s strong average performance both in the lead up to and after the initial rate cuts and the US recessions keeps us biased for higher prices as vortices of macro uncertainty rise. We estimate that gold will hit $2,000 this year.
Flight to complete safety!
Meanwhile, Goldman Sachs has raised the probability that the US economy will enter recession in the next 12 months to 35% amid small-bank stress. Elsewhere, Europe’s bank shares came under pressure again as Credit Suisse (CSGN.S) stocks fell after its biggest investor said it would not be able to provide the Swiss bank any further financial aid. Phillip Streible, chief market strategist at Blue Line Futures in Chicago, comments:
This is pure safe harbor trade. There are many concerns about Credit Suisse and now European banks are indeed coming under quite a lot of pressure. So this is the flight to complete safety.
Volatility will increase in the coming days
Gold prices in sterling hit a record high, while euro bullion rose to all-time highs it saw last year. People go for US Treasury papers, gold, silver and dollars. “They are coming out of riskier assets like US equities and economically sensitive metals like copper, platinum and palladium,” Streible says.
Gold rose despite the sharp bounce in the dollar. A strong dollar generally suppresses demand for dollar-priced bullion. OANDA senior market analyst Craig Erlam says volatility is expected in the coming days ahead of the Fed meeting.
“Gold offers the most competitive risk/reward on screen”
cryptocoin.com As you follow, gold rose to $1,930, its highest level since Feb. According to a report by TD Securities’ strategists, the yellow metal could stage a major rally. In this context, strategists make the following assessment:
Cash rush risk is mitigated by significant physical demand and neutral discretionary trader positions. The yellow metal seems to offer the most competitive risk/reward on our screen as strong physical demand driven by the East keeps losses under pressure if central banks stay on the path to fight inflation despite bank liquidity concerns. The risks of consolidation cycle ending, as well as on-demand streams being reorganized into strong physical streams, could turn out to be a significant escalation.
Investor allocation to gold remains low
Gold price reinforces the previous decline for now. But economists at ANZ Bank expect US banking stress to stimulate investor demand in the long run. In this direction, economists make the following statement:
The market’s expectation of a smaller Fed rate hike was supported by inflation data coming in as expected at 0.5% monthly for June. However, demand for the safe-haven asset remained strong. Despite these gains, investor allocation to gold remains low. We expect this banking turmoil to revive investor demand in the long run.
