On Monday (March 13), spot gold rose to a new high of $1,913.17 per ounce since February 3, with a daily increase of 2.46% (a daily increase of more than $40). U.S. Treasury yields tumbled as uncertainty over the collapse of a Silicon Valley bank prompted investors to seek safety, prompting investors to bet that the Fed may struggle to re-accelerate rate hikes this month and does not rule out a rate cut this year.
California banking regulators shut down Silicon Valley Bank on Friday (March 10), and New York-based SignatureBank was shut down two days later on Sunday (March 12) when the Federal Deposit Insurance Corporation (FDIC) took control of New York-based SignatureBank. This is the biggest failure of the U.S. banking industry since the 2008 financial crisis. The U.S. dollar index fell to a new low of 103.672 since February 16, and the U.S. 2-year Treasury yield fell by 800 basis points in the last two trading days. The fall in U.S. Treasury yields has allowed gold to show some strong upward momentum, with prices sensitive to the yield curve, especially the short-term yield curve. With soaring borrowing costs across the U.S. hurting the health of the financial system, investors now see the Fed as unlikely to resume raising interest rates this month and possibly cutting them by the end of 2023. Before the Silicon Valley Bank incident, the possibility of raising interest rates by 50 basis points this month was as high as 70%. Spreading panic in markets could prompt Fed officials to reconsider the pace of rate hikes at the upcoming FOMC meeting, as maintaining financial stability is a top priority. Given the recent stress in the banking system, investors no longer expect the FOMC to raise interest rates at its March 22 meeting, and there is considerable uncertainty about the path of rate hikes beyond March.
U.S. consumer price data to be released on Tuesday (March 14) will be in focus as investors look for clues on the Federal Reserve’s next move. The short-term yield curve fell sharply after the U.S. non-farm payrolls data for February was released on Friday. Although the number of new jobs was higher than expected, the unemployment rate rose to 3.8%, and the market interpreted it cautiously and impetuously. Recent events have shown that gold remains a safe-haven asset as it is able to benefit from market uncertainty, and market participants’ adjustments to rate hike expectations are boosting gold prices. But whether gold soars to the sky is still uncertain. Because it will depend on upcoming U.S. economic data, such as (Tuesday’s) CPI data. If the data remains strong, it will give the Fed sufficient reason to continue raising interest rates, and gold will inevitably be under pressure from the dollar to raise interest rates. On the contrary, if the data, especially the inflation rate, shows a gradual decline, gold will run away for fear of breaking free.
Wang Gang, Guangdong Branch, Bank of China
Opinions are personal and do not represent those of the organization