There are two reasons; one, the rush to safe haven assets (of which gold is one) and two, the possibility that the Fed may now reconsider future interest rate rises.
Fed policy – and market expectations around Fed policy – has been a particularly important driver of gold prices in recent months, says Metals Focus.
“Much of the price upside seen in Q4.22 reflected investor expectations that the Fed would turn more dovish, anticipating modest rate increases in H1.23, before seeing cuts emerge during H2,” it says.
“However, in the past couple of months, as US economic data pointed to a still robust economy, expectations were adjusted to the Fed remaining hawkish for longer.
“Meanwhile, rising nominal and real rates increasingly acted as a headwind to institutional investors who could secure around 4% in risk-free vehicles, like 10-year Treasuries.
“This, combined with a strong dollar, again due to a hawkish Fed, had weighed on gold.”
The collapse of SVB has once again changed the market narrative around Fed interest rates, says Metals Focus.
“Leaving aside the bank’s risk-management and governance failings, there is no doubt that the rising interest rate environment has played a key role it its demise,” it says.
“From its side, the Fed has not as yet commented on how SBV’s failure may affect its interest rate policy over the rest of the year.”
Gold’s next big test: the March rates decision in the US
The US Fed makes its next rates decision on March 22.
This decision, and the messaging that accompanies it, will be crucial to the outlook for gold over the rest of 2023, says Metals Focus.
“It is of course tempting to adopt the dovish expectation [lower rates] that is fast becoming the consensus. However, we are not convinced this is right,” it says.
Investors should weigh up other factors that have underpinned the Fed’s hawkish [higher rates] stance, namely that inflation is stubbornly high, the US labour market is robust and equity valuations are historically high, despite the past couple of months’ declines, it says.
“As such, in our base case, we would still not rule out some further rate hikes in the next few months and certainly struggle with the idea of cuts within 2023.”
Yesterdays CPI report clearly shows inflation is still a problem despite the SVB collapse and wider banking situation.
What do you think Jerome Powell will do to US interest rates when he announces the rate decision at the Fed Meeting next week March 21st /22nd?