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The banking crisis made gold shine in the first month of spring

Published by Karl Martin Karus in category Articles on 27.04.2023
Gold price (XAU-SEK)
24437,00 SEK/oz
  
- 7,00 SEK
Silver price (XAG-SEK)
309,34 SEK/oz
  
- 1,82 SEK

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 pushed prices higher

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.

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Silicon Valley Bank – SVB

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.

Credit Suisse

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.

Gold showed strength despite interest rate rises

Interest rates and pessimism

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.

Gold is strong

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.

The technical picture is strong

Gold’s technical picture looks very bullish. Here are some key technical factors suggesting that:

  • Bullish trendline – Since mid-2018, the gold price has increased in the long term, with more minor and more extensive corrections, but overall very bullish.
  • Ascending triangle – another significant indicator of gold price potentially making new all-time highs is the breakout of the ascending triangle. That might indicate a new bullish gold trend—even 3000 USD/oz is not out of the question.
  • Moving averages – Moving Averages confirm the trend is bullish and does not seem to be stopping any time soon.

What are the critical support and resistance areas to keep an eye on?

  • 2070 USD area. A new all-time high is reached when this resistance level is broken, and the sky is the limit.
  • 1925 USD area. First solid support level to follow. If this level is broken, we might see a minor correction in price. If this level is not broken, we see another test to break the all-time high levels.
  • 1800 USD area. A superior support level. It matches with the 50-day MA, a double indicator of a firm support level. It is doubtful that the price will break downward of that level soon.
  • 1720 USD and 1640 USD levels. If something unlikely happens and the price drops further from the 1800 USD level, those support areas are the next ones to look out for.

How far can the gold price go if a new all-time high resistance level is broken?

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:

  • 80% retracement – 2711 USD
  • 80% retracement – 3736 USD
  • 80% retracement – 4761 USD
  • 60% retracement – 5395 USD

Gold price (XAU-SEK)
24437,00 SEK/oz
  
- 7,00 SEK
Silver price (XAG-SEK)
309,34 SEK/oz
  
- 1,82 SEK

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