COMEX gold prices witnessed another leg of rally and is poised for a third consecutive weekly gain of more than 3.5%, boosted by safe haven bids. The yellow metal started the week on a positive note, as investors rushed for haven assets, amid signs of failure of the Silicon Valley Bank in the US, after the bank took steps to shore up its capital position. The failure of SVB also gave rise to speculations that the Fed might go for a smaller 25 bps rate hike in the March FOMC meeting, from previous expectations of a 50 bps hike.
The shift in short-term interest rates this week was unlike anything seen for more than four decades. US two-year treasury yields plunged from a 15-year high of 5.08% notched on 9th March to a seven month low of 3.72% on 15th March. That’s a fall of a whopping 136 basis points in a span of five days. The one-day drop in two-year yields on Monday was the biggest since the Volcker era in the early 1980s.
More events unfolded on Wednesday, as Credit Suisse lost almost a quarter of its value to hit a new record low, after the top shareholder Saudi National Bank ruled out more aid leading. The collapse of SVB along with few other banks, followed by Credit Suisse plunge raised concerns of a financial contagion into the broader economy, the aftermath of the fastest rate hike in the US for decades. Gold, often seen as a safe haven during times of economic stress, has been one of the biggest beneficiaries of this turmoil.
US Inflation data mostly turned out to be a non-event. The annual inflation rate in the US slowed to 6% in February 2023, the lowest since September 2021. Still, core inflation remains at elevated levels and came in at 5.5% compared with 5.6% in January. Prices of food rose at a slower pace, while the cost of used cars and trucks continued to decline. Energy prices also eased sharply, while an uptick was seen in shelter and electricity prices. Shelter prices, which accounts for 32% of the headline inflation number is the reason why we are not seeing a significant ease in US CPI. Meanwhile, US weekly jobless claims fell by 20k from the previous week to 192k in the week ended 11th March, pointing to a stubbornly tight labor market.
The recent emergency measures reversed around half of the balance-sheet shrinkage that the Fed has achieved since it began the QT in June last year. Banks borrowed a combined $164.8 billion from two Federal Reserve backstop facilities for the week ended 15th March, according to data published by the Fed. The prior all-time high was $111 billion reached during the 2008 financial crisis. Lending by FDIC totaled $142.8 billion, taking the total toll above $300 billion.
Elsewhere, holdings in the SPDR gold ETF, rose from 901.4 tonnes as on 10th March to 914.72 tonnes as on 16th March, an increase of 1.5%.
SNB’s $54 billion loan to Credit Suisse has stabilized markets for now. Investor morale has also improved after the biggest US lenders agreed to contribute $30 billion in deposits to First Republic, easing speculation that the bank could be the next to fail. During the March policy meeting, ECB hiked rates by 50 bps, further pushing borrowing costs to the highest level since late 2008, despite current financial market instability. The move by the ECB has also raised expectations for a 25 bps rate hike from the Fed during next week’s FOMC meeting. Such a move is also warranted for now, as the Fed suddenly abandoning the fight against inflation and changing the rhetoric might add to more market uncertainty, affecting the credibility. Having said that, we are nearing an end to the rate hikes in this cycle and history has always proven that gold rises with the Fed cutting rates.(The author is CMT, EPAT, VP-Head Commodity Research, Kotak Securities Ltd)