22.03.2023 11:35 AM
Gold is losing ground

The higher you climb, the harder you fall. The week to March 17 was the best for gold since the beginning of spring 2020. Like then, there were serious shocks in the markets, and central banks took emergency measures. Three years ago, a pandemic was at the epicenter of events, now a banking crisis. But as soon as the clouds began to dissipate, speculators began to take profits on XAUUSD longs, and the precious metal sank like a stone.

U.S. Treasury Secretary Janet Yellen says the government has intervened and will intervene to protect depositors if it sees the risks of a run on the banking system. Coupled with the bailout of First Republic and the takeover of Credit Suisse by its rival UBS, this reassured investors. Stock indices rose, and markets returned to the topic of the Fed's tightening monetary policy.

Dynamics of the federal funds rate hike

This image is no longer relevant

According to Standard Chartered, the demand for safe-haven assets may be fleeting, but gold's reaction to real Treasury yields is not. The XAUUSD rally was driven by stress in financial markets, fears of contagion, increased recession risks, and heightened volatility. As soon as the situation in the banking sector stabilized, interest in safe-haven assets faded, and the growth in U.S. bond yields associated with expectations of an increase in the federal funds rate forced gold to flee the battlefield.

The divergence with oil also testifies to the fact that the quotes of the precious metal had previously increased due to its status as a safe haven. The fall of the latter signaled serious health problems in the global economy.

Dynamics of oil and gold

This image is no longer relevant

Along with rising bond yields, XAUUSD is under pressure from an increase in the likelihood of the Fed raising borrowing costs by 25 bps at the meeting on March 21–22 from 60% to 89% within three days. Gold has traditionally been hurt by monetary tightening, as this process tends to lead to a stronger U.S. dollar and higher U.S. debt rates.

However, note that the banking crisis has weakened the U.S. economy. Undermining trust in the system is far from the only problem. Credit institutions will become more cautious, which will reduce the amount of borrowed resources they provide. Consumers who do not receive them will reduce spending, and GDP will begin to slow down. Thus, SVB and other banks did a part of the job for the Fed by cooling the economy. According to various estimates, the effect of their bankruptcies is equivalent to an increase in the federal funds rate to 150 bps.

This image is no longer relevant

The cooling of the economy is good news for the precious metal, so it is not likely to return to the levels from which it began to rise in March.

Technically, there is a pullback to the upward trend on the daily chart of gold. If the "bulls" are able to stop the attack of the rivals near the $1,925 per ounce pivot point, the risks of revival of the formerly prevailing trend will rise, and we'll have a chance to buy the precious metal on the rebound from the support.

Marek Petkovich,
Analytical expert of InstaForex
© 2007-2024
Earn on cryptocurrency rate changes with InstaForex
Download MetaTrader 4 and open your first trade
  • Grand Choice
    Contest by
    InstaForex always strives to help you
    fulfill your biggest dreams.
  • Chancy Deposit
    Deposit your account with $3,000 and get $1000 more!
    In June we raffle $1000 within the Chancy Deposit campaign!
    Get a chance to win by depositing $3,000 to a trading account. Having fulfilled this condition, you become a campaign participant.
  • Trade Wise, Win Device
    Top up your account with at least $500, sign up for the contest, and get a chance to win mobile devices.
  • 100% Bonus
    Your unique opportunity to get a 100% bonus on your deposit
  • 55% Bonus
    Apply for a 55% bonus on your every deposit
  • 30% Bonus
    Receive a 30% bonus every time you top up your account

Recommended Stories

Can't speak right now?
Ask your question in the chat.
Widget callback