By Dave Allen for Discount Gold & Silver
Amid a near-$100 billion run on smaller and medium-sized banks, gold prices appear heading toward all-time highs.
More and more analysts agree that there’s a lot more room for gold – and silver – to climb as global banks struggle and the Fed ponders further interest rate and quantitative tightening decisions.
Fed data show that bank customers collectively pulled over $98 billion from their accounts for the week ending March 15th, as Silicon Valley Bank and Signature Bank failed.
Friday, after Treasury Secretary Janet Yellen, Fed Chair Jerome Powell and over a dozen other officials convened a special closed meeting of the Financial Stability Oversight Council, they insisted the nation’s banking system “remains sound and resilient.”
The run on bank deposits after the SVB and Signature Bank collapses is noteworthy. Yet, customers have been gradually withdrawing cash from banks for close to a year.
Since April 13, 2022, total deposits have fallen $655 billion or 3.6% – from a peak of $18.16 trillion to $17.50 trillion last Wednesday.
Volatility Good for Gold
While this banking turmoil has been getting more intense and the value of the dollar has been slowly tanking, gold and silver have been riding the waves.
Gold breached the all-important $2,000 mark on Monday to hit its highest point since last March. It’s since fallen back somewhat to enter the weekend around $1,980.
And what the Fed decides about interest rates at its next meeting on May 2-3 is seen as more and more critical.
Tiona Teng of CMC Markets says, “A sooner Fed pivot on rate hikes will likely cause another gold price surge due to a potential further decline in the U.S. dollar and bond yields.” She expects gold will trade between $2,500 to $2,600 an ounce.
Investors have been flocking to gold and Treasuries the past few weeks as bank stocks have been hammered by the shuttering of Silicon Valley Bank and Credit Suisse’s subsequent implosion and buyout by rival UBS.
Gold has risen around 8% since early March when SVB was hit by the bank run.
Gold’s all-time high was $2,075 in August 2020. Lee Ying Shan of CNBC believes that central bank demand will likely keep wind in its sails.
That position is shared by Wheaton Precious Metals CEO Randy Smallwood who notes, “Continued central bank buying of gold bodes well for long-term prices.” Smallwood sees gold hitting $2,500.
Craig Erlam at Oanda thinks “it’s very plausible that we see a strong performance in gold over the coming months. The stars appear to be aligning for gold, which could see it break new highs before long.”
Demand for gold skyrocketed to an 11-year high in 2022, owing to “colossal central bank purchases,” according to the World Gold Council. Central banks bought 1,136 tons of gold last year – a 55-year high.
Fitch Solutions predicted that gold would notch a high of $2,075 “in the coming weeks.”
The arm of the ratings agency based that outlook on “global financial instability,” adding that it expects gold to “remain elevated in the coming years compared to pre-pandemic levels.”
Erlam believes, “Interest rates are at or near their peak, cuts are now being priced in sooner than anticipated on the back of recent developments in the banking sector.”
He added that he thinks that dynamic will boost gold demand, even if it coincides with a softer dollar.
What’s Next?
So, what the Fed does next is keeping investors’ eyes on their potential impact on gold prices.
As of this morning, over 88% of Fed funds watchers see the Fed holding the line on rates at its early May meeting; the other 12% see another 25 basis point hike.
Nicky Shiels of MKS Pamp puts it like this: “Overall, the Fed will have to choose between higher inflation or a recession, and either outcome is bullish for gold.” She sees gold going to $2,200.
A further weakening of the dollar may continue to support rising gold prices, according to HSBC’s James Steel, who correctly predicted the Fed’s last 25 basis point hike.
Steel said, “What we saw earlier [last] week was the simultaneous events of both gold and the dollar. And that’s quite unusual,” referring to the rise in both gold prices and the dollar last week.
As precious metal investors know, there’s normally an inverse relationship between gold prices and the U.S. dollar; i.e., as the dollar falls in value, the price of gold usually rises – and vice versa.
But investors tend to like the perceived safety of U.S. Treasuries and gold simultaneously during periods of financial stress like we’re going through right now.
Steel observed:
“This scenario doesn’t happen often, but when it does – it’s always a sign of elevated investor concerns.”
Use this recent turn of events to your advantage.