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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

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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

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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.

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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
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