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Gold settled about $50 below the $2,000 an ounce level on Monday as markets looked towards Washington to increase confidence in the banking sector with back-to-back hearings examining recent bank failures in the U.S.
After testing the $2,000 level a few times last week, gold retreated and settled at above $1,950 on Monday as risk sentiment improved.
However, markets remain worried about the state of the banking sector in the U.S., which is why all eyes are on the two House and Senate committees hearing Tuesday and Wednesday that will aim to boost confidence in the banking sector and examine regulatory failures that led to the collapse of Silicon Valley Bank and Signature Bank.
The witness list includes Federal Reserve Vice Chair for Supervision Michael Barr, Federal Deposit Insurance Corp. (FDIC) Chairman Martin Gruenberg, and Treasury Undersecretary for Domestic Finance Nellie Liang.
Barr’s testimony, released on Monday, blamed the banking failures on a “textbook case of mismanagement.” He added that the banking system is “strong and resilient.”
“We will continue to closely monitor conditions in the banking system and are prepared to use all of our tools for any size institution, as needed, to keep the system safe and sound,” Barr said. “Our first step is to establish the facts—to take an unflinching look at the supervision and regulation of SVB before its failure. This review will be thorough and transparent, and reported to the public by May 1.”
After the collapse of Silicon Valley Bank, Signature Bank, and Credit Suisse, mounting financial stability fears triggered massive risk-off sentiment and shifted the monetary policy outlook from rate hikes to rate cuts this year.
“The failure of two U.S. regional banks and a major Swiss bank and the surge in UK government borrowing costs last year show that the effects of monetary tightening take time to filter through the economy and that the vulnerabilities associated with an aggressive tightening phase often show up in unexpected places,” said World Gold Council’s asset allocation strategist Jeremy De Pessemier. “This will probably warrant caution on the part of the Fed, reinforcing our view that we may be closer to the peak of central bank hawkishness.”
A situation like the banking crisis is why people own gold, and precious metal investors are getting rewarded, VanEck Associates CEO Jan Van Eck said.
“We are at the very beginnings of what could be a several-year cycle in gold. I also put Bitcoin in that category. Finally, as a gold investor, you’ve been rewarded over the last couple of weeks. Weakness in the banking system and gold rallied. That’s why you own gold,” Van Eck told CNBC.
This scenario supports the gold market, especially if it will be mixed in with a mild recession, De Pessemier said in a research note.
“Gold has a key role as a strategic long-term investment and as a mainstay allocation in a well-diversified portfolio. While investors have been able to recognise much of gold’s value during times of market stress, the structural dynamics pointing towards a low-growth, low-yield environment should also be supportive for the precious metal,” he noted.
The immediate reaction from investors to the changing Fed outlook has been to get into the gold market, said Kinesis Money external market analyst Carlo Alberto De Casa.
“Earlier in March, the Fed’s rate was forecast to peak between 5.50% and 6.00%, before starting to slow down in 2024,” the analyst said. “Now, after the recent rate increase from 4.75% to 5.00%, the majority of investors believe the Fed’s tightening process is almost complete and that although there is a chance rates will rise to 5.25% in April, otherwise the current level of 5.00% can be seen as the terminal rate and basic interest rates could start to decline from the summer.”
Gold is up more than 7% on the month, with June Comex gold futures last trading at $1,975.70, down 1.30% on the day.
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