The gold price recovered from its February decline to break above the $2,000 level for the first time since March last year, mainly driven by the banking crisis. The critical role of gold as an external asset of the financial and banking system has emerged.
In March, the spot price of gold rose by a total of 7.8 percent to $1968.5 an ounce. While gold moved mainly sideways in the second half of March, the appreciation gained momentum in early April. Gold crossed the 2037 dollar level on April 5. The record dates back to August 2020, when gold reached $2,069 an ounce.
Silver fared even better, rising 14.4 percent to $23.9 an ounce in March. In early April, silver also crossed the $25 level again.
Between April and October last year, gold fell for seven consecutive months. Since then, gold has risen in four of the five months. The technical picture for gold looks rather good, and if current levels are maintained, we could soon see previous records tested.
The banking crisis and uncertainty environment work well for gold as the precious metal has limited exposure to third parties such as banks. However, it is essential to distinguish between physical and virtual gold. For the latter, the third-party risk is very closely linked to the banks, depending on the instrument. Physical gold provides the best protection against the dangers of the financial system.
Silicon Valley Bank was the most significant failure since the 2008 financial crisis. The bank had purchased US Treasuries, which had declined in value as interest rates rose. As customers began withdrawing funds from the bank, the bank was forced to sell the bonds, causing liquidity issues. There was then a domino effect, with other customers quickly withdrawing money.
After years of problems, Credit Suisse, a major Swiss bank, was also on the verge of bankruptcy. According to Martin Schlegel, deputy governor of the Swiss central bank, the bank would have gone bankrupt if the government had not intervened. This would have ” very likely been followed by a financial crisis in Switzerland and worldwide.” Credit Suisse was taken over by UBS, Switzerland’s largest bank, and creditors and shareholders suffered significant losses.
In turn, the banking crisis fueled speculation that central banks would pause raising interest rates despite high inflation. However, monetary policymakers appear to be intent on keeping inflation under control.
On March 22, the Federal Reserve decided to raise the benchmark interest rate by 25 basis points to 4.75-5 percent. The European Central Bank raised three key interest rates by 50 basis points. On the other hand, traders believe that the US will begin to lower interest rates as early as this year. This indicates that markets are highly pessimistic about the economy.
Despite the ongoing rate hikes, gold has shown strength. This indicates that gold is an asset that investors prefer to turn to in the event of financial or banking system problems.
With record levels of sovereign debt and high inflation and interest rates, bonds’ role as a “safe haven” asset is being questioned, despite rising yields. This is especially true given that the fall in bond prices caused problems for UK pension funds and Silicon Valley banks in the autumn.
This is something that no one ever knows. We can only speculate with popular technical tools, such as Fibonacci retracements.
Fibonacci retracements suggest two potential areas where to gold price could go if the new all-time high is broken and confirmed.
According to Fibonacci retracements, they are: