Gold jumps above $2000 due to European and American banking crises

Gold prices breached the level of $2,000 an ounce today, Monday (March 20), for the first time in a year, and the yellow metal closed last week, recording the best weekly performance since March 2020, with gains amounting to about 6.51% at $1988.67 an ounce, and since the beginning of this month until now, gold prices have increased. By about 8.9%, which is the best monthly performance since July 2020, due to the impact of the banking crisis in Europe and the United States.

Uncertainty over the financial turmoil has caused gold prices to surge, and the consensus gold market expectations have seen a major shift, as they believe that the Federal Reserve will have to ease monetary policy.

Looking ahead, the price of gold trading is expected to cross the psychological barrier of $2,000 an ounce under the influence of market concerns about banking risk contagion, however, the guidance of Reserve Bank Chairman Jerome Powell's press conference on March 22 will be very important. Insisting on fighting inflation vigorously will lead to a short-term rise in gold prices.

Gold rises with the decline in inflation data

Last week, the US economy released a series of economic data, the most important of which is the inflation data that the market cares about the most, and although it is basically in line with market expectations, the market believes that this is still not enough to change the course of raising the Fed interest rate.

Specifically, the US economy announced on Tuesday (March 14) the Consumer Price Index (CPI) for the month of February, and the index recorded an increase of about 6% on an annual basis, less than the previous reading in January at 6.4%, thus slowing inflation growth for the eighth month on Respectively, however, the monthly rate of the core CPI in the United States recorded 0.5% in February which is higher than the previous monthly rate and market expectations of 0.4%, and the rise in the core rate of inflation means that the Federal Reserve still has the possibility to continue raising interest rates, Employment data for the month of February also came strong in the United States, and despite those data that reinforce the continuation of interest rate hikes, gold rose due to the increasing demand to buy it as the best safe haven in times of economic turmoil and financial crises.

High demand for haven due to banking crises in Europe and the United States

And due to the wave of European and American banking crises that shook the global market, the demand for a haven once again became the main driving force behind the rise in gold prices, which boosted its prices to breach the psychological support level of $2,000 an ounce.

The collapse of the Silicon Valley bank on March 10 highlighted the vulnerability of banks to the sharp rise in interest rates, which raised concerns about the First Republic and Credit Suisse, and the decline in European and American bank stocks exacerbated the market turmoil, which made investors panic continue to spread, which highlighted light on the safe-haven nature of gold.

In addition to the safe-haven demand generated by the European and US banking crisis, the US debt ceiling "farce" has entered its peak which has also led to higher market demand for gold.

The report issued by the US Treasury Department last week showed that the total US debt has accumulated to 31.4 trillion US dollars, and the cumulative budget deficit in the first five months of this fiscal year has risen to 723 billion US dollars, up 62% from last year, if the government cannot America will have to pay the various bills due next month, it will have to suspend the payment of some pensions and suspend or reduce the salaries of soldiers and federal workers, and the credit of the US dollar will also be greatly affected.

Under normal circumstances, tensions in the US will exacerbate the risk aversion in the market due to the farce of the debt ceiling, which will lead to lower US bond yields and higher gold.

Sharp fluctuations in Fed expectations will not hinder the strong rise in gold prices

The outbreak of the banking crisis in Europe and the United States has fluctuated market expectations about the pace of the Federal Reserve's interest rate hike. The Reserve Bank raised interest rates by 50 basis points in March, however, these expectations were shattered by banking turmoil in Europe and the United States.

The Silicon Valley and Signature Bank crisis came after the market interpreted the February 'Nonfarm Payrolls' report as not 'strong' enough, causing the odds of the Fed to hike interest rates by 50 basis points in March to be priced at less than 50. %, but after falling into a bankruptcy crisis and the Federal Reserve launching a new emergency financing plan for banks, market expectations that the bank would raise interest rates by 50 basis points in March declined to less than 10%.

There are more and more voices in the market saying, "It is time for the Fed to consider suspending interest rate hikes or even cutting interest rates", and experts suggest that bank turmoil may cause the Fed to suspend rate hikes.

Until last Wednesday (March 15th) investors quickly increased their bets that the Fed will cut interest rates this year, however, the European Central Bank continued to raise interest rates by 50 basis points as planned on Thursday (March 16th) despite the crisis. Banking in Europe, the market believed that the Fed might copy the action of the European Central Bank and began to re-bet that the Fed will raise interest rates next week.

In just two weeks, the market's expectations about the Fed's monetary policy in March went through a round of drastic changes, from raising the initial interest rate by 25 basis points to 50 basis points and then back to 25 basis points and then betting on a pause. At that time, it was gold price is rising steadily, after breaching the $1900 level, prices fluctuated for 3 days, but returned to continue the rise and achieve the largest weekly gains in three years.