The bullion surged substantially during the previous week as rising worries about the US and European financial collapse prompted substantial inflows into conventional safe-haven commodities.
Financial crisis eases
However, as the dust has settled after Credit Suisse and the latest victim of the current neo-financial crisis, was acquired by competitor UBS on Monday, gold lost the upward impetus that pushed it to this year’s highs of over $2,000. Nevertheless, the financial markets, including commodities, should remain turbulent and extremely sensitive to new information on the global banking sector.
Bloomberg News reported on Monday that US treasury officials are exploring ways for regulators to guarantee more than the existing Federal Deposit Insurance Cap (FDIC) of $250,000 for bank deposits in order to boost trust in the banking sector. This further persuades investors that the government will intervene to rescue depositors.
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If concerns about the crisis subside, we may see a slight revival in risk appetite assets, which would provide support for global equities, but likely undermine gold prices. This week will be significant for markets, as the US Federal Reserve (Fed), Bank of England (BoE), and Swiss National Bank (SNB) will have policy meetings. In addition, after the historic takeover, hearing what the SNB says about Credit Suisse‘s recent developments will be exciting.
Moreover, the Fed’s monetary policy decision will be closely watched. The probabilities presently favour a 0.25 % point increase in interest rates, which is less than initially expected.
If the Fed opts for a 0.50 % point rate rise, however, the dollar would appreciate, and the price of gold would fall; conversely, no rate hike will have the opposite impact. Nonetheless, given that US inflation continues to trend substantially over the Fed’s target range, the central bank may hike rates further.
Demand for gold surges
Open interest and activity in the futures markets have soared, highlighting the gold price’s massive increase (about 10% over the course of a week). According to data from the CME Group, the volume of contracts traded has increased from around 13,000 in the first week of March to an average of more than 40,000 in the most recent seven trading days.
Interest vs volume of contracts chart, source: CME group
In other news, the Goldman Sachs bank’s head of commodities forecasts a commodities supercycle fuelled by China and capital flight from energy markets and investment this month in response to banking sector fears.
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“Historically, when you have this kind of scarring event, it takes months to get capital back,” according to Jeff Currie, global head of commodities for Goldman Sachs.
Momentum remains bullish
Gold must establish a position above $1,950, representing potential short-term support, to maintain its uptrend. A slide below this level might prompt more selling, which would likely target $1,900.
On the upside, if bullion surpasses this week’s highs of $2,010, a surge into all-time highs above $2,080 is possible. There should not be any drastic change in the near future as the price has been above the 200 day average for a few weeks now.
Gold futures 1W chart, source: tradingview.com, author’s analysis