Recession, rate hikes and bullion demand

Apr 01, 2023

Gold prices stabilised this week, with the precious metal last trading just below USD $2,000 per troy ounce (oz).

Silver continued its recent rally, up 4% in USD terms to UDS $23.80 oz, with the gold to silver ratio continuing to fall, having decreased from 88 to 83 in the last month. Risk assets rallied this week, as fears over a potential escalation in the northern hemisphere banking crisis abated, for now at least, with equities up 2-3% in Australia and North America, analysed ABC Bullion.

Commodities were also bid, with oil up 6% and now back near USD $75 per barrel. Bond yields rose, with the Fed continuing to hike policy rates, despite signs of a slowdown in economic activity, with inflation still at uncomfortably high levels. Bullion demand remains incredibly robust, as investor continue to gravitate toward tangible safe-haven assets.

Precious metal prices ended the week largely unchanged, with gold last trading just below USD $2,000oz, while silver continued to rally, and is now sitting just below USD $24oz. While gold was flat over the period, it did experience choppy trade throughout the week, with the precious metal at one point threatening to break below USD $1,950oz.

That pullback was temporary, or at least has proved to be so far, with the precious metal well bid at those levels, with the potential for a strong close heading into the week, month and quarter end that could see gold finish above USD $2,000oz.

Safe haven buying is obviously a continued factor supporting gold, as is the return of some investment from the ETF side of the gold market, which has been largely absent, and indeed a net negative for gold demand for some time.

These factors are reinforcing a bullish outlook for gold, with UBS noting that gold could hit its March 2024 price target of USD $2,100 oz earlier than expected. Specifically, UBS analysts noted; “Gold has already been gaining due to the recent market volatility.

The spot price broke above $2,000 an ounce to hit a 12-month high. Meanwhile, Gold exchange traded funds look set to post net inflows in March for the first time in almost a year. Given recent events, we think there’s a chance that gold prices will reach our end-March 2024 target of $2,100 earlier than expected. While a repeat of the global financial crisis appears to have been averted, we think it will take time for investor confidence to be fully restored.”

While the recent banking crisis that was kickstarted by the collapse of Silicon Valley Bank has been the primary driver of gold’s recent bounce, and surge in demand, there are other potential tailwinds (many of which are interlinked) for bullion going forward.

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