To The Moon

After the sudden and rapid collapse of Silicon Valley Bank and Signature Bank, the Federal Government launched an emergency rescue of the U.S. banking system in an effort to halt the contagion of further collapses.

Although the Federal Deposit Insurance Corporation (FDIC) can intervene and cover bank losses, the banking sector was hard hit as the FDIC itself can run short of funds if number of banks collapse at once, because the FDIC deposit insurance fund is significantly smaller than the total deposits insured.

The key question investors ask is whether the U.S. is willing to back all U.S. bank deposits after the sudden outflows contributed to the collapse of several U.S. regional banks over the past few weeks.

Last week investors initially cheered Fed Chair Jerome Powell’s indications about a potential pause in tightening and the critical change of language from expectations of “ongoing increases” to “some additional policy firming”, alongside the widely expected 25-basis-point hike.

However, U.S. Treasury Secretary Janet Yellen failed to alleviate market fears during her latest congressional hearing, saying “I have not considered or discussed anything having to do with blanket insurance or guarantees of deposits,” meaning each situation would be reviewed on a case-by-case basis.

While stocks, U.S. dollar and oil ($WTI Crude Oil - Apr 2023(CL2304)$, $WTI Crude Oil - May 2023(CL2305)$) have been crashing, real estate plummeting, bonds devaluing, gold has responded positively to the uncertainty surrounding the banking crisis. Although markets might be betting prematurely on a rate cut by the Fed by the end of the year, such prospects are positive for gold in the long-term.

The turmoil caused by the liquidity crisis in the banking sector has helped gold surge from a low $1,813 to a high of $2,031 over the past two weeks. Moving forward, the banking crisis is likely to keep the volatility in the equity markets elevated which should continue to be a tail wind for bullion.

While gold is likely to encounter an initial resistance around its March 2022 high of $2,078, if financial stability concerns continue, the price of the precious metal could challenge its previous high and potentially post a new record high.

Clearly gold is becoming the favourite asset class on the market as investors remain nervous about how quickly authorities would be able to contain further banking turmoil. Also, a weaker U.S. dollar through 2023 is likely to provide further support for gold.

The U.S. dollar is trading in a downward trajectory since September 2022 and while the Federal Reserve could raise interest rates by another 25-basis point, this is unlikely to reverse the greenback’s down trend.

The rising interest rates and the U.S. dollar strength were the main headwind for gold throughout 2022. As the Federal Reserve is approaching the end of its monetary tightening cycle and the U.S. dollar has peaked, a potential final rate hike is unlikely to have a material effect on the price of the yellow metal. However, market volatility and uncertainty, and an upcoming rate cut are likely to continue to attract investors to gold.

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This is an adaptation of the weekly technical analysis series prepared by my colleague Violeta. I'm posting them here on TTM on her behalf.

For articles on broader economic events that are tangential to tactical market movements, visit asianomics.substack.com