Recession concerns boost gold prices

Gold prices surged on Wednesday, testing the $2,015 per ounce resistance. If gold prices increase, further resistance may be encountered near $2,075 per ounce, while if gold prices decline, support may be found near $1,970 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. Increased risk aversion sentiment on Tuesday, combined with the dollar’s decline, boosted gold prices. US Treasury Secretary Janet Yellen in a letter to the US Congress warned that the office would not meet all US government obligations by June 1. Mounting fears of a US debt default drove gold prices up on Tuesday.

The dollar declined after Wednesday’s Fed policy meeting, with the dollar index dropping to the 101.4 level. US Treasury yields declined, with the US 10-year bond dropping below 3.43%. 

The Federal Reserve raised interest rates by 25 basis points at its monetary policy meeting on Wednesday, bringing the benchmark interest rate to a 16-year high target range of 5.00% to 5.25%. The rate hike was fully anticipated, however, and had already been priced in by markets. 

Market attention was primarily focused on the FOMC statement and press conference for forward guidance. The FOMC statement released after the 2-day meeting was dovish, providing support for gold prices. The US Central Bank has signaled that its hawkish policy is coming to an end, as prolonged tightening is putting the economy at risk and the recent turmoil in the banking sector has increased recession concerns. Markets interpreted the Fed’s statement as a clear sign of a pause in rate hikes after May’s interest raise. Many analysts predict that there is a high probability of rate cuts starting in November, depending on economic conditions and inflationary pressures. 

The recent crisis in the banking sector caused risk sentiment to plummet, raising the appeal of safe-haven assets. Renewed concerns about a banking sector meltdown provide support for gold prices. First Republic Bank announced last week that its deposits fell 40% in the first quarter of this year, and the bank’s stock went into freefall. First Republic collapsed on Monday but was bought by JPMorgan after US regulators invited other banking institutions to step in. On Tuesday, the stock prices of two more banks plunged. Fears of a banking sector meltdown are returning, enhancing gold’s haven status.

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Written by:
Myrsini Giannouli

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