Gold soars as investors turn toward safe-haven assets

Gold prices soared on Monday, as the collapse of the Silicon Valley bank raised recession concerns, driving investors towards safe-haven assets. Gold prices also benefitted from the dollar’s decline, climbing to $1,915 per ounce. If gold prices increase, resistance may be encountered near $1,960 per ounce, while if gold prices decline, support may be found near $1,808 per ounce. 

Gold prices have been predominantly directed by the dollar’s movement, as the competing gold typically loses appeal as an investment when the dollar rises. The dollar plummeted on Monday in the aftermath of the Silicon Valley Bank collapse, with the dollar index dropping below 103.5. US Treasury yields were similarly affected, with the US 10-year bond yield plunging to 3.45%. 

The collapse of the Silicon Valley Bank on Friday has caused market chaos, with many assets experiencing high volatility. The Federal Reserve and US banking regulators stepped in over the weekend to assure investors that they would have access to their funds on Monday. Later on Friday, a smaller Bank, Signature Bank, fell victim to the panic created by the SVB collapse. The resulting run on the bank’s deposits led to the third-largest bank failure in U.S. history. President Biden and US regulators have sought to limit the damage to the banking system by announcing that the funds of customers of US banks would be protected. 

Fed Chair Powell's testimonies before the US Congress last week were more hawkish than anticipated, driving gold prices down. Powell warned that the US central bank is prepared to accelerate the pace of tightening if price pressures remain high. 

The Federal Reserve raised interest rates by only 25 basis points at its February meeting, bringing the benchmark interest rate to a target range of 4.50% to 4.75%. Increases in central banks’ interest rates put pressure on gold prices since assets yielding interest become a more appealing investment compared to gold as interest rates rise. 

Last week market expectations of the Fed’s next rate hike bounced back and forth between 25-bp and 50-bp. Powel’s testimonies raised market odds of a 50-bp rate hike early in the week. The collapse of Silicon Valley Bank on Friday though brought market odds back down to 25-bp. This week some analysts predict that the Fed might even pause rate hikes completely until the crisis is over. The SVB collapse may steer the Fed towards a less hawkish direction, in fear of contagion in the financial sector.

This week US inflation data are expected to affect gold prices, as they may very well determine the pace of future rate hikes. CPI data on the 14th and PPI data on the 15th are this week’s most highly anticipated fundamentals. The US inflation data are likely to cause volatility in dollar prices, which may also be transferred to gold prices.

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Written by:
Myrsini Giannouli

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